Introduction
With a clearer idea of your income and expenditure, the next step it to make sure you've identified any possible shortfall and how you'll deal with that.
Define the Shortfall
Once we know both expenditure and income figures, it should be fairly straightforward to work out the difference between the two. For the purpose of this exercise, you're looking for the point at which the difference between the two is greatest, which is likely to be early on in your intended retirement.
Let's say that you have one pension kicking in at age 60, another at age 65 and your state pension at 67. Your partner, who may be a different age to you, will have a similar staged set of incomes. Your income is likely to be building over time, and it is lowest at the beginning of the process.
At the same time your expenditure is likely to be highest earlier on in your retirement so the biggest shortfall is therefore most likely to be in the first five years, unless you are planning to take lower paid or part time work. Try to build a timeline of income – what is coming in and when? And then, determine the greatest shortfall.
Determine the Goal
Once you have the point of greatest shortfall, we’re going to apply a rule of thumb – I want you to multiply that figure by 25. Now maybe that will give you a scary number, but don’t panic just yet. I think this will probably be a bigger number than you actually need to retire and hopefully you have already made some good progress towards attaining this figure.
In all of this you’ll need to be aware of inflation. You should be using figures in today’s money ideally, but you can work back from them if you are given figures that are anticipated at retirement date. Here is a link to an inflation calculator to help you work back from a future figure to get today’s money and vice versa.
Assuming you’re in the ten years before your intended retirement date, that’s still long enough for inflation to be a factor. Try to work everything back into today’s money. That’s the only kind of money we can understand. We know what things cost now, but not in the future, so we need to work only in today’s money.
Eventually you’ll need to get to a point where you have a target figure. Listen back to Season 15, episode 3 for more detail on this. That target figure for our capital – the money we’ll need to use to bridge the gap between our income and our expenditure – is what we’re aiming for.
I trust you to exercise some common sense. If you think the figure is crazy high, then remember it’s a 25x multiple of the highest difference between secured income and expenditure. Probably you can manage with way less that, but it’s a target, and no-one ever regretted having more money behind them when they retired than less…
When we get into the planning stages, it can be useful to have access to a planning tool. You have a couple of options here. 7IM have a free app called 7IMagine which has a tool called MyFuture which is really good, exceptional even for a free app – you don’t have to be a client of 7IM to access it. Even better is Voyant Go, which is available through Meaningful Academy in the second and third phases.
All clear? Good. Now, let's turn to what provision you've already made for retirement.
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