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October 21, 2024
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Retirement Planning • October 21, 2024
How Much Do I Need to Retire?
Hoxton Blog • How Much Do I Need to Retire?
We’re all living longer and staying healthy for a larger proportion of our lives. That’s great news, because it means we have many good years to look forward to in retirement. The downside? You’ve got to pay for all those extra years.
Facing the need to fund 30+ years of living expenses can be a daunting prospect, but it’s achievable for anyone with the right amount of forward planning.
Particularly for people living overseas and having to deal with cross border complexities, retirement planning requires careful consideration of various factors, from your desired lifestyle, to where and when you plan to retire.
With the right tools and knowledge, you can start building a strategy that ensures you retire comfortably. This article will explore how to calculate how much you need for retirement, the key considerations to keep in mind, and how Hoxton Wealth can help you on this journey.
Retirement Planning Steps at Every Age
When it comes to retirement planning, age matters. The earlier you start, the better, but it’s never too late to make adjustments to ensure a secure retirement. Your approach to saving and investing for retirement will evolve as you age.
In Your 30s
At this stage, retirement may feel a long way off, but it’s crucial to start saving early to take advantage of compounding returns. Focus on contributing to retirement accounts such as a 401(k), IRA, or SIPPs.
Many people will have a lot of expenses during this time, with a mortgage in the early stages and potentially a young family to pay for. A good goal to aim for is to try to save around 10% of your net income.
Make sure your investments are positioned for growth, given you have a long time to ride out any market fluctuations.
In Your 40s
This is often a period where your earnings are at their highest, but family expenses are also likely to still be high. Where possible, you should aim to maximise your contributions to retirement accounts. Look for ways to boost your savings, through employer matching schemes or tax relief on contributions.
Like in your 30s, your investment strategy should be focused on the long term.
In Your 50s
Retirement is on the horizon, and it’s time to assess how much you’ve saved and if it’s enough to support your desired retirement lifestyle. Take advantage of catch-up contributions available for retirement accounts, and if you haven’t already, now is the time to speak with a financial advisor.
For many people, this decade is the biggest opportunity to grow your retirement assets. Any children are likely becoming more independent, your mortgage will be more manageable than it was, and your earnings could be the highest they’ve ever been.
It’s really important to take advantage of this time, so that you can provide yourself with the best retirement possible.
In Your 60s and Beyond
As you approach retirement age, it’s important to finalise your plans. Decide when you’ll begin drawing from your retirement accounts and how you’ll manage withdrawals to ensure your savings last.
The major shift that happens here is a move away from maximising growth, to minimising short term risk. That way, you can be sure that your retirement plans won’t be derailed but any untimely market volatility.
By this decade, you should have a close relationship with a financial advisor who understands your family and financial goals inside and out.
How to Calculate How Much You Need to Retire
To determine how much you need for retirement, there’s a lot to factor in. You need to consider your retirement duration, savings contributions, and investment returns.
There are rules of thumb you can use, such as the 4% rule, which suggests that a withdrawal rate of 4% of your total investment balance is sustainable over the length of a retirement.
However, those rough guides are nothing more than that, a very rough guide. You shouldn’t rely on them as the basis of your financial decisions.
In order to really get a clear understanding of what your future financial picture looks like, you need to use the right tools.
The Hoxton Wealth App is a perfect example, with the WealthFlow feature allowing you to see if you have enough assets to live the lifestyle that you want. You can map out and visualise impact of future life events, build in tax rates, and test out ‘what if’ scenarios to stress-test the integrity of your journey towards financial independence.
Even then, there are some key considerations and questions to ask yourself before you can get a clear picture of how much retirement money you need.
When do you want to retire?
Even just a couple of years can have a major impact on your retirement savings. The difference between retiring at 62 or 65 might not seem like a lot, but it’s three more years you’ll need to fund your living expenses, as well as having three fewer years to save.
As well as understanding when you want to step back from a full time career, you should also consider what life looks like after that. Are you planning on stopping work entirely, or are you going to seek part time work or paid advisory positions (such as a board seat or non-executive director)?
What returns are achievable?
Your investment returns play a significant role in how quickly your retirement savings will grow. By investing in a diversified portfolio, you can benefit from compounding returns, where the interest earned on your investments also earns interest.
It’s important to choose the right mix of investments based on your risk tolerance and time horizon, and having the right financial planner is a huge benefit when it comes to treading this line.
Where will you retire?
Your location plays a huge role in how much you’ll need, and where you should invest. Retiring in a country with a lower cost of living can stretch your retirement savings, while living in a high-cost area will require more funds. If you’re planning to retire overseas, consider the implications of currency exchange, taxes, and healthcare costs.
This is an important question to consider early on, because it will help dictate where you put your retirement savings. For example, if you’re planning on retiring in the UK then you might not want to contribute too much to US-based retirement accounts such as a 401(k) or IRA.
What does your retirement lifestyle look like?
Think about the kind of retirement lifestyle you envision. Do you plan to travel extensively or enjoy a quiet life at home? Will you maintain your current home or downsize? The more extravagant your lifestyle, the more you’ll need to save.
The more clear you can get about what your retirement looks like day to day, the more accurate your financial plan can be.
Using the right investment vehicles
Once you have a clear understanding of how much you need to retire, you can start to work towards meeting your goal. One of the most important aspects of this is choosing the right accounts. The benefits of tax relief and tax-free growth can add double-digit percentages to your balance every year, so you can’t ignore them.
There are several financial products that can help you save for retirement, depending on where you’re located.
SIPPs and Personal Pensions (UK)
In the UK, pensions such as the state pension or personal pensions are key tools for retirement savings. Ensure you’re maximising your contributions and taking full advantage of employer matches where available.
ISAs (UK)
An Individual Savings Account (ISA) is an excellent way to grow wealth tax-free. It’s only available for UK residents, but it’s possible to add £20,000 per year, per person into these accounts which are free of capital gains and income tax.
It’s also possible to withdraw funds tax-free, making them an excellent way to roll up gains quickly. You can even open a Lifetime ISA, which offers a 25% government bonus to any contributions you make (up to £4,000 per year) in addition to the tax-free benefits.
401(k) or IRAs (USA)
For U.S. residents, a 401(k) or an IRA (Individual Retirement Account) are fundamental retirement savings vehicles. These tax-advantaged accounts allow you to save more efficiently, with contributions growing tax-free or tax-deferred until withdrawal in retirement.
How Hoxton Wealth Can Help
Hoxton Wealth offers a suite of financial planning tools and services to help you navigate the complexities of retirement savings. With the Hoxton Wealth App, you can easily track your net worth progress and make adjustments to your investment strategy as needed.
Our team of international financial advisors can also provide personalised advice tailored to your specific goals and location, whether you’re saving through a SIPP, 401(k), or other investment structure.
Planning for retirement is one of the most important financial tasks you will face, but with the right strategy, it’s achievable. By starting as early as you can, considering key factors like when and where you’ll retire, and making use of the appropriate retirement savings products, you can ensure a comfortable and secure future.
No matter where you are in your retirement journey, taking proactive steps today will pay off in the future.
How Can We Help You?
If you would like to speak to one of our advisers, please get in touch today.
Contact Hoxton Wealth
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