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Kirk Rice Blog

Retirement Income – Is My Target Realistic And Possible?Written on July 8, 2020 by Kirk Rice LLP

Retirement Income – Is My Target Realistic And Possible?
Financial Services Questions

The Question:

My wife retired three years ago, and during this time, we have been managing fine on my income and her pension. I am planning to retire and calculate our combined net pension income will be £29,200. This will comfortably cover our outgoings, including the running costs of a holiday property. We think we need an additional £12,000pa to cover extras such as holidays, weekend breaks and occasionally changing our car. We have savings of £320,000 which we intend to use to fund the additional £12,000. Is this retirement income realistic or possible, if so, how? We are both aged 65

Kirk Rice LLP answers:

To generate a net income of £12,000pa from capital of £320,000 will require a net return of 3.75%pa. If you pay income tax at 20% on all of that, it means you need a real return of 4.69%pa. Is this realistic? No. Is it possible? Yes

Before the financial crisis in 2008/09, you might have received a return in the region of 6%pa gross from a good deposit account. Now you would do well to get over one %pa gross if you are prepared to tie the money up for five years or more.

A cashflow will show how long your money lasts, and I have built-in that holiday spending rises more quickly than general prices, at say four %pa. Spending at £12,000 a year means your money would last until age 84 and you would have received £347,000 after tax at an interest rate of 1% a year. The cashflow shows that at age 75 you would be spending over £17,700 a year and would still have £196,000 in the account.

Do you think your needs will change as you get older, maybe fewer long-haul holidays? For example; if you halved your spending from age 75, the cashflow reveals your money would support spending until you are 90.

The cashflow can reveal whether you need to invest to achieve your objectives. If you are happy to reduce spending over the years, then you may decide you do not need to take investment risks.

Alternatively, we can model investing some of the money. If we take the money, you will spend after age 75, say £196,000, the cashflow reveals how much extra growth and the probability of success given the risks and costs. Investing involves management and administration costs, but income tax might be reduced through careful investment selections and products that are eligible for ISA.

If you doubled the return offered on deposits,i.e. to 2%pa for ten years, you would have £212,000 available to spend at age 75. This is equivalent to an extra year of holidays.

There is a very real risk at least one of you will outlive your money. If additional money is then required to pay for care, how would you deal with that?

Before looking at how you use the money, you need to consider the above and decide what is more important; capital security or income; looking at my figures you may have to compromise on one or the other. There will be many other aspects to be considered in developing a coherent plan for your future, and I would recommend the plan is regularly reviewed as your needs, tax legislation, investment markets and products all change.

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Any reader interested in discussing how they might achieve their target retirement income email info@kirkrice.co.uk or call 01344 875 000 to arrange an appointment with one of our Financial Planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.

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