Financial Planning

Calculating your retirement fund

25th February 2021

The Author: Oliver Maher

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Oliver is Business Development Director United Advisers. He looks after new clients to helps them to assess and their immediate and long-term needs.

Calculating exactly how much money you will need for retirement can feel like a daunting task. But, planning retirement, especially as an expat, is a key part of sound financial planning. Working, or living internationally, has wonderful benefits, but it can complicate retirement and inheritance planning somewhat. Ensure you know where you will be a tax resident during retirement and make time to speak with financial professionals for specific questions. 

Calculating how much you might need

There isn’t a magic retirement sum that works for everyone. Retirement planning is about the lifestyle you want in the future. You start with your vision and what matters most to you. Then a financial planner will help you calculate the future annual cost of your desired lifestyle and your current net worth. This information forms the foundation of your retirement plan and helps ascertain if you can retire at your desired age, or if you need to make adjustments to your savings schedule. If you are starting your retirement planning the same process is used to calculate how much you need to save and what the required monthly contributions will be.

There are a number of key pieces of information your financial adviser will need to know to be able to help you plan your retirement fund accurately:

  • Desired retirement age
  • Current savings
  • Asset and liability balances
  • Dependents and their financial situation
  • Anticipated inheritances 
  • Retirement location/s

As we mentioned, the ideal sum to have saved for retirement depends on individual circumstances and future plans. However, there are certain planning principles that can help should you wish to work out your pension plan on your own.

The 4% rule and retirement planning

One of the most popular methods of calculating retirement is to use the 4% rule. This suggests that those who take up to 4 percent from their portfolio in their first year of retirement and adjust that amount for inflation in subsequent years stand a greater chance their wealth will outlive them. This is ultimately the aim in retirement planning, to have just enough left at the end so that you never run out of money, but not so much that your dependents end up with a large inheritance bill or that you missed out on enjoying your hard-earned savings! 

To apply the 4% rule

If you want a pension of €40,000 Euro in your first year of retirement you’ll need a pension pot of €1 million:

€1 million x 4% = €40,000

You can use the four percent rule to calculate the pension pot you’ll need by using 25 x your-annual-spending. For an income of €100,000 a year, you’ll need a retirement investment of :

€100,000 x 25 = €2.5 million

Using Bengen’s research, the four percent rule suggests that, if you invest in a balanced portfolio you should be able to withdraw 4 percent of your investment during the first year and then, adjusted for inflation, every year for thirty years of retirement without running out of money.

This rule is only meant as a guideline. It assumes an investment portfolio evenly split between stocks and bonds, a market with regular peaks and troughs, and average economic conditions. William Bengen himself said:

I always warned people that the 4 percent rule is not a law of nature like Newton’s law of motion. It is entirely possible that at some time in the future there could be a worse case”

Monthly contribution planning

How much you should be saving monthly towards your pension depends on your current financial position. If you’ve already acquired significant wealth, having saved early, then it is likely that your monthly contributions will be smaller. The sooner you start saving the lower your monthly contributions are likely to be:

As you can see from the above chart, to reach €1 million euros in savings, which generates approximately a €40,000 pa revenue, you’d only have to contribute €700 per month of savings at age 30, however, this increases rapidly should you start saving later in life. 

If you are able to invest a lump sum into your retirement fund you could reduce the monthly payments, even if you started saving later in life. A good approach can be banking end of year bonuses to boost retirement funds knowing that you can maintain your current lifestyle using your base salary. 

Retirement planning considerations for expats 

We’ve written in detail about the key considerations for expats with regards to retirement planning and we’ve summarised the key points below. The biggest challenge for expats is often remembering the various pensions they’ve accumulated over the years. If you’ve worked across a number of countries and organisations over the years it can be worth investing in a full pension history search to ensure no pension ‘pots’ are forgotten. 

Personal  and company pension location and drawdown 

You might be planning a strategic retirement location offering a low cost of living and lower taxation rates. However, it’s not always as straightforward as it seems: as an expat, your retirement options depend, in part, on your nationality and whether you can access retirement benefits in your native country while living overseas.

For example, it can be more difficult for a US citizen to access retirement funds from abroad, and retain certain tax obligatons whereas British expats have access to the Qualifying Recognised Overseas Pension Scheme (QROPS).

State pension accumulation and age

If you are aiming for early retirement you are likely self-funding, at least for the first few years. Expats have often accumulated a number of state pensions but, they each come with their own caveats. It is important that you’ve checked your rights and when you will be able to access your pension. This is one area where it is worth speaking to a specialist, especially if you have a complex work history involving a number of countries. 

Key questions to ask yourself

The first part of a discovery meeting with a financial planner will be getting to know you and your ambitions for your retirement

What age do you want to retire at?

You might not have an immediate answer but it is one of the most important questions you need to ask yourself. If you are in a relationship this is a critical conversation to have as goals can change over the years and it is important to be in alignment. 

Even if you don’t have a clear age, a ball park goal is a good place to start. Knowing if you are going to have a state pension income or want to retire before 50 is essential to develop the right plan. You should be revisiting the plan annually with your financial planner so you retain flexibility in your planning because life tends to throw a few curve balls. 

Which activities do you plan to do when you retire?

The above question can also help you focus your ideal retirement age. Some activities might require a certain bill of health and this may push you towards an earlier retirement. Or perhaps when you map out all the countries you want to visit and the holidays you wish to have, you may realise that you need to start travelling sooner rather than later. Conversely, you may have clear professional ambitions that mean you want to delay retirement. 

Do you expect to still be supporting financial dependants?

Financial dependants can have a significant impact on retirement planning. It may be a desire to finish funding private education, or wanting to support dependents financially for key life events (such as weddings or property purchases). 

Ensure you take the time to discuss fully your financial support plans with your adviser to ensure they have the whole picture for your retirement. 

Do you expect to maintain a number of properties?

Pension planning isn’t solely about calculating your revenue stream when you stop working. It is also important to consider your outgoings and the potential impact they will have on the enjoyment of your retirement. 

Having multiple properties can be both a blessing and a curse. It all depends on the enjoyment you gain from the ownership. Again, the response isn’t set in stone and we tend to find our client’s opinion evolves over time.  

How would losing a partner impact you?

The question that most of us want to avoid thinking about can have the greatest impact on retirement planning. We wrote in detail about planning for the unexpected. The conversations and thought process can be uncomfortable, but it reduces significant stress and financial pain should the worst happen. There are a number of provisions that can be put in place that secure your retirement revenue. 

Would you work a few more years to have a more comfortable retirement?

Knowing your personal priorities can really help for effective planning. Ideally, you won’t have to make any kind of trade-off but it is valuable to consider what matters most. Would you, for example, work an extra year if it meant a further five years of retirement revenue? Our financial modelling tool can quickly simulate the impact of working more, or less, on your network and income during retirement.