Our base maths for retirement is simplistic but we did give some thought to how our spending might change over time. Our view was to broadly look at three decades. The first would include long-distance travel, enjoying quite a lot of socialising, going out and treats while we were still fit and healthy – and yes, it would be our most expensive decade. In the second decade, we’d reduce the travel or limit it to the UK and Europe and be slightly more sedate. We expect to slow up a little and not do quite so much but still enjoy a local social life. Similarly, our spending would reduce. Finally, in our third decade, we expect costs to rise as we buy additional care and support and, at some point, move into a smaller apartment or care facility. While costs will rise, downsizing will release capital and the State Pension will kick in. I admit this is a generalised view; we’re using a flat monthly spending figure in our plan while recognising that it will vary but overall a single figure is easier to work with. The one unknown in our plan is our contention that we’d proactively move into a smaller retirement apartment or care home. Having witnessed this first hand with older relatives, the move is a difficult one to make and I understand why it’s often not addressed. Such a move signifies an acceptance that your life is coming to an end and it also means giving up most of the physical possessions you’ve taken a lifetime to accumulate. It’s also harder to do the older you get and why it’s often left too late or becomes a distressing change.
Later life care costs
Looking at residential care homes (as opposed to assisted living apartments), data from the ONS and 2021 census suggests that typical life expectancy in a home for someone in the 70–80 age bracket would range from four to five years for men and five to six years for women. Partly due to this image of care homes heralding the final stages of your life, many people resist the move, preferring to ‘soldier on’ in their own property while everyday tasks become more difficult. Not least, your mobility suffers and with it, social interaction, leading to a downward spiral in your quality of life. Contrast this with having staff to cook, clean and look after you, as well as providing a regular range of social activities. Yes, it’s expensive but you have pretty much everything covered and the only paperwork you need to worry about is the invoice. If you approach it with a positive attitude, you can have a comfortable and stress-free tail end to your life.
Our plan includes downsizing into more appropriate accommodation in our seventies. I hope we have the resolve to commit to that plan but know it’s going to be a difficult decision. Either way, we’ve thought through the options. If you absolutely hate the idea of more support and care later in your life and want to stay in your family home and peacefully slip away in your favourite armchair, that’s fine. Unfortunately, we don’t get the luxury of choice but, as with other decisions, include it in your plan.
In terms of cost, average rates in 2022 (according to Age UK) for a residential care home were £800 a week and, if you require nursing care, £1,078 a week – although this varies geographically and by the quality of individual homes. These are big numbers: £41,600 and £56,056 per year respectively. Equally, the cost of additional care at home is expensive and can spiral upwards, without the benefits of a complete care home package, so while it’s not guaranteed you’ll need to spend it, it’s better to be prepared for it.
There are many rules covering the funding of care but if you’re reading this book, I’m making an assumption that you’re interested in managing your financial future and you’d likely fall into the self-funding bracket. However, it’s worth noting that when you look at care homes, there are options for some support. My point here is that you’d be better placed to research this earlier rather than dealing with it in your eighties when you’re close to making some big life decisions. If you’re looking for advice, engage someone accredited with the Society of Later Life Advisers (SOLLA), as they will have the most up to date information on options. If you have children, that’s great – but don’t automatically assume that they’ll be on hand and willing to look after you!
Funding your core retirement
We’ve touched on what your final years might cost but what do you really need or want for your ‘regular’ retirement? It will obviously vary considerably depending on how lavish a life you intend to lead but, helpfully, there’s frequently updated research that gives you a good guide. The table in Figure 2 (Chapter 2) shows figures of around £23k and £34k per annum for a single person and couple respectively (uplifted with a London weighting to around £28k and £41k). When we did our deep dive five years ago, our personal benchmark was £36k and we’d probably increase this figure to £40k given current inflation and cost of living headwinds.
Our approach is nominally to be ‘broke at 85’ but this rather flippant statement does need clarifying. We use it as a planning metric; if we were to spend all our money (less the value of our house as a proxy for living somewhere), at what rate would we need to spend it? We can then track against that figure to determine whether our investments are keeping pace with our plan or whether we’re overspending against that plan. As we don’t have children, we don’t have the added pressure or desire to leave an inheritance. It doesn’t mean that we don’t have family beneficiaries in our wills; it’s just that they’ll receive the residual of our estate when we’ve gone, rather than specifying how much each of them will get. Depending on your circumstances, you may wish to set something aside or help family members financially while you’re alive, which is fine, as long as you plan for it and don’t leave yourself short. We also have a large safety margin in that we don’t include the State Pension in our calculations, nor the value of the house, which realistically would be sold to fund a care home or assisted living costs.
It’s also worth noting that investments can be treated differently after death and that should be part of your planning process. For example, you could retire at 60 and pay for a single annuity that pays you a certain amount each month for life. If you then die at 65, you may well have been paid less than the value of the annuity and, in this case, the provider takes the balance of that money. Albeit from beyond the grave, I’d personally feel cheated if this happened! If you have a SIPP, under current rules, since you still ‘own’ the pension pot, anything you don’t draw down can be part of your estate to be inherited by your beneficiaries.
Summary
The endgame is to build an investment portfolio that covers your lifetime and is sufficient for your retirement at a time that suits you. While many people like think about ‘the dream of early retirement’, I’d contend that fewer people are prepared to consider and plan for the very real challenges they may face in later life, such as failing health and the cost of care. There are no hard and fast rules here and I’m not recommending a specific route other than to think and talk about what you believe are the best options for you, and build your plan accordingly. For the most part, I’ve promoted the idea of taking the long-term view, investing little and often, but starting early and not being too frivolous. As you get older, you’ll likely hit a point when your mindset changes. For me, it was when my when my parents died but for Lou, it was after her cousin and a close friend were hit with stage four cancer diagnoses. Both died within two years. You suddenly think ‘Hang on a minute, I could die tomorrow, so what’s the point of saving? I should be spending and living for now.’ For majority of our lives, we’ve followed the rather ambiguous concept of ‘jam tomorrow’ – or to paraphrase, don’t spend it today, save it for tomorrow. But you’ll hit a tipping point when you realise that you’re beyond middle age and life is for living. The advantage of having taken the approach to ‘save for a rainy day’ is that, if you’ve invested sensibly, you now have the funds to do just that.
In the same way that paying off your mortgage lifts a huge burden from your shoulders, getting to that point in life where you can do pretty much whatever you want is hugely liberating. We retired early by following the principles laid out in this book and this has allowed us to do many things, not least to take time to look after our health, travel more and contribute to local community projects. We’re much happier and healthier as a result. Acknowledging that not everyone will be able to replicate this entirely, I would hope that following some of the principles you can also achieve a more stable financial future than you might otherwise have had.
Key takeaways
Find someone you’re comfortable talking to and broadly shares the same mindset.
Write a will and seriously consider LPAs for yourself and your older relatives.
Take time out to think about your whole lifespan. What might you want your retirement to be like, and where and how would you like to spend your ‘twilight years’?
Take it slowly! This is a not a one-time exercise; it’s about building your financial plan to a realistic time frame and meeting your needs.
"How am I doing?"
Chapter 8
Managing and tracking your money
Now that I’ve outlined an approach to get your spending under control and reiterated the benefits of drip-feeding your investments in simple, low-cost products, how do you monitor it? I’m not going to suggest that you need to spend hours a month actively managing your portfolio but it’s important to check it regularly with a light touch so you can see the progress you’ve made and whether you’re on track.
There are two elements to successfully achieving this: knowing what your goal is and knowing what motivates you. In terms of your goal, it’s great to have the ‘big picture’ idea of where you want to end up but you might also find it helpful to have smaller goals along the way. We didn’t really think of our goal as ‘early retirement’ as some might understand it; we phrased it as being able to ‘live comfortably without having to be tied down by earning a regular [employed] income’. This came about because we already had some rental income and knew the cost of our home and lifestyle, so we figured if we paid off the mortgage and had a reasonable pension pot, we could achieve it. It’s not critical but it’s a good idea to set a time frame alongside your goal to help you with tracking. For example, aiming to retire by the time you’re 60 – but if it turns out to be 58 or 62, it’s still a great result, so don’t beat yourself up too much if you’re a little off. This is about having a long-term vision, not a hard and fast deadline. Smaller staging goals might be to pay off your mortgage within 15 years, clear your credit card debt over the next four years or reduce your annual spending by 10% next year.
The second factor of what motivates you now comes into play. I’ve touched on motivation before and it’s important in terms of how you track your finances too. I’m not going to give you a template and tell you which metrics to use, because if they’re not your style, you won’t buy into them. But I will suggest some that have worked well for us. For example, you might like the straightforward target of paying off your mortgage balance verses reducing your spending; both contribute to the same thing (spending less) but the mindset is different. Some of you will be happy looking at numbers regularly or plotting them on a graph, while others will be more engaged by the process and challenge of selling off unwanted items online and seeing the balance build up. Whatever you do, keep it simple! Although I do track several figures on a spreadsheet, it’s not a complex one and it has now been replaced by the automated reports from an app. I probably overanalyse because I want to prove to myself that what I’ve stated is actually true; for example, as well as tracking monthly balances and month-on-month changes, I also look at a rolling six- and 12-month variance to smooth out any bumps or dips in performance – but you don’t need to go into as much detail unless you want to. Whatever you do, don’t worry – I’m not going to force you to spend hours in front of a screen puzzling over formulae!
Key metrics
The metric that we used most effectively is one described in an earlier chapter – and that’s how much you’d need to spend to deplete all your investments by the time you die. In order to do this, you need to know:
your net worth (the sum of all your investments, savings, ISAs, less any loans or debt) – explained in Chapter 2
your life expectancy (the date you think you might die, or the later of the two if you’re doing this with your partner)
either your current cost of living or an estimate of the cost of living you’d like in retirement.
Simply take your net worth and divide it by the number of months you think you might have left to live. Compare it with your cost of living estimate and you’ll see whether your financial position allows you to fund your aspirational lifestyle. I’m not going to lie – the first time you do this it will probably look dreadful and might be a negative figure but there’s a reason why I like this metric to help visualise your financial health. First, if it’s negative, it means you owe more than you’ve saved, so perhaps one of your mid-stage goals might be to turn this metric positive. Fortunately, every month, there are levers working to improve this ratio. If you’re overpaying your mortgage, proactively reducing the balance owed and putting money into your pension, you’ll be incrementally increasing the value of your investment. In addition, if you look at it every month, the denominator will have reduced (to put it bluntly, you’ve one month less to live and pay for).
Mortgage debt is likely to be the biggest reason for a negative figure but the calculation can still be used if you don’t have one and are renting. The difference will be that the future cost of living value will include ongoing rent, whereas this won’t be a factor when you’ve paid off your mortgage. If you’re renting but hope to buy in the future, don’t try to build this into the calculation; just adjust the metric when it changes.
You might argue that you should include the value of your house or flat in your net worth and yes, while it’s true that it’s part of what you own, you still need somewhere to live, so you don’t want to be including it in a calculation where you’re literally ‘spending everything’. Basically, this metric is just a simple snapshot of your current financial position, which ideally you’d want to track monthly. I (still) monitor ours on the first of every month and note it in a spreadsheet. It could look a little horrible for the first few months but once you have more than a year’s worth of data, create a graph and you can more easily see your progress. As I’ve said before, there are no quick wins to wealth creation and the same is true here; it’s unreasonable to expect immediate results. The beauty of this as a way to track your progress is that the ratio works in tandem with the ‘spend less and earn more’ concept.
Once you have this metric under way, you can then compare it to your target income and this allows you to answer the question as to whether or not you’ve reached the point at which you can retire, or however you’ve phrased your big-picture goal. Let’s take the figure from Chapter 2 that suggests an annual income of £28,300 for a moderate lifestyle for a single person in London. This would give you a target of £2,358 a month and, in theory, if your metric was higher than this, your total investments (available to spend) would fund you for the rest of your expected life. It’s simple but it works to give you clarity about where you are on the journey and when you’ll achieve it. You can always change the target but the inputs should remain the same – only their values should change. You’ll note I don’t include the State Pension as future income, although in theory I should. I prefer to have it as my safety net and also as an additional hedge against inflation and increasing future costs. In essence, I’m pessimistic with this metric and it gives me confidence that if the numbers look good, I’ve still got some headroom in my plan to balance out any unforeseen future changes.
There are many other ways to evaluate whether you’ve saved enough for retirement but I’m not aware of an approach that helps you monitor how you’re progressing in the way that this does. One approach that’s worth mentioning is the ‘4% rule’, not least because it’s simple but it’s good to have two metrics running in parallel because if both say you’re doing OK, you probably are. The 4% rule is also referred to as the ‘safe withdrawal rate’. Thinking of your investments, it’s the amount you can withdraw each year without eroding your capital. If you’d amassed a pension and ISA pot of £450,000 when you hit retirement, you could withdraw 4% (£18,000) every year (or £1,500 a month) and the residual investment growth would retain a balance of the original £450,000. In essence, this is the reverse of some of the numbers shared earlier, that on average a stock market index will return a certain percentage and if you only withdraw that amount, your capital (original stock holding) retains the original value.
Taking the same figure and applying our ‘broke at 80’ logic, if you were 60 with a life expectancy of a further 20 years, you could spend £1,875 a month to deplete your funds. The two figures aren’t miles apart and neither will be 100% accurate but they do give a good indicator of your long-term financial position.
It’s true that both approaches don’t take inflation into account, which will erode the spending power of your money over time. We originally tried to build in some investment returns and inflation into our model but when you start using average figures we tended to come out with the investment gains equalling out the inflation losses over the long term. That’s why I’m comfortable using the flat figure analysis and not overcomplicating it by accounting for both inflation and returns. What the 4% model does help with is suggesting that you can spend from your investment while still retaining a balance, which is great if part of your plan is to leave an inheritance to others; it gives you a model for safe spending while preserving capital.
Some might argue that this analysis is too loose for such an important topic but, as I’ve said before, I’m not a maths wizard and needed something simple I could follow. It’s also held true for us over the past 20 years, so I believe it has some credibility. What has also surprised us in our first 12 months is that despite our spending increasing and having no income, our net worth has remained stable and even increased a little against a backdrop of a not particularly positive economy. In other words, despite trying hard, over the past year, we’ve not been spending hard enough!
Technology and open banking
Tracking your investments might sound like a bit of a headache but advances in technology mean this is now much easier and the widespread adoption of open banking has further enhanced this. Basically, open banking is a mechanism that allows banks and financial institutions to share (customer and transaction) data via agreed interfaces with third party applications. Whereas in the past you had to rely on paper statements, you can now access your financial data from one consolidated platform as well as your bank’s proprietary internet or mobile interface. Originally the main UK high street banks were asked to share data but as third party providers developed apps, more have followed and now most financial institutions share data to some degree. I’ve come across a couple of institutions that haven’t yet integrated the technology but most of those have committed to it in the future.
