Retirement

[seayakin]

I've often wondered about if we really are facing a time again when a lot of the elderly will be living in poverty.

http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html

I was really struck by this:

First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

I contribute quite a bit to my retirement but I don't have kids and other expenses to prevent me from saving. Even with that, I'm not sure I will meet the 20X my income the article suggests for retirement without some turnaround in the markets.

 

[The Don]

Poverty in retirement is a very real fear for me.

I'm 45 years old and have been saving diligently for my retirement since I started working at 21. Mrs Don is the same and between us we have been saving between £2,000 and £3,000 a month for many years.

The trouble is that while in the past this investment would have grown exponentially (and in real terms), over the last 15 years it has been really difficult to even keep pace with inflation never mind outperform it.

At the moment, our joint retirement fund is just a little over £500,000. We have estimated that, with current levels of UK inflation and low annuity rates, to have a comfortable retirement we will require a pension fund of between £1.5 and £2.0 million (equivalent to around £700,000 today). In the expectation that investment returns will continue to be flat we will need to up our savings to £3,000 - £4,000 a month for the next 20 years. we cannot afford that.

The only hope that we have for even being able to afford to eat is that in addition to our pension pot we also have a rental property (which is bought and paid for). At the moment this is bringing in £1,000 a month (about 1/4 of our planned retirement income) and there is every hope that rental income will keep pace with inflation.

We are very comfortably off and have no children and we're completely screwed. I can't imagine what it's going to be like for people with low incomes and lots of children.

 

[Puppycow]

We are very comfortably off and have no children and we're completely screwed. I can't imagine what it's going to be like for people with low incomes and lots of children.

You're doing a lot better than me if that's any consolation.

I'd be able to save more if I didn't have two kids.

 

[GlennB]

Poverty in retirement is a very real fear for me.
....
The only hope that we have for even being able to afford to eat is that in addition to our pension pot we also have a rental property (which is bought and paid for). At the moment this is bringing in £1,000 a month (about 1/4 of our planned retirement income)
....
We are very comfortably off and have no children and we're completely screwed.

I don't understand this at all.

You'll have £500k+ in a retirement fund, you'll be getting £12,000+ p.a. from rental of a fully paid-up property alone, you'll get your state pensions when the time comes, and you equate all this this with potential "poverty"?

I can only think you have a different definition of "poverty" and "screwed" than most people.

 

[Jaggy Bunnet]

The only hope that we have for even being able to afford to eat is that in addition to our pension pot we also have a rental property (which is bought and paid for). At the moment this is bringing in £1,000 a month (about 1/4 of our planned retirement income) and there is every hope that rental income will keep pace with inflation.

Your planned retirement income is £48k (presumably in current prices?) and you think you are going to struggle to afford to eat?

You must have some huge fixed expenses.

 

[Guybrush Threepwood]

At the moment this is bringing in £1,000 a month (about 1/4 of our planned retirement income)

Errm, I'm 49 and live what I consider to be an extremely comfortable life, with travel and entertainment pretty much whenever I want, and Governor Marley and I do not earn GBP 4K per month. What the hell kind of drug and hooker fuelled sybaritic excess do you need your retirement to be?

 

[The Don]

Your planned retirement income is £48k (presumably in current prices?) and you think you are going to struggle to afford to eat?

You must have some huge fixed expenses.

We're planning on £50k as a retirement income, which is the equivalent of around £30k now (using the rule of 72 and assuming 3% inflation).

We assume that this will allow us a comfortable retirement, one where we will be able to take a couple of holidays a year, buy a car now and again, fund our hobbies (maybe we'll play more golf and I'll spend some money on our classic cars). We'd like to be in a position not to have to move out of our current home until we want to. Running that home is not cheap. Examples include:

• Council tax is currently running at just under £2k a year
• We've spent £1200 on heating oil this year, I can see that rising as we get older and need a warmer house
• We can easily spend £2,000 a year on the house, especially as I get older and may not be able to do some of heavier DIY myself
• Electicity is in the £500-£800 range annually and that's due to go up in excess of inflation

So just keeping the house going will cost over £6k a year, 1/5 of our planned retirement income.

 

[The Don]

I don't understand this at all.

You'll have £500k+ in a retirement fund, you'll be getting £12,000+ p.a. from rental of a fully paid-up property alone, you'll get your state pensions when the time comes, and you equate all this this with potential "poverty"?

I can only think you have a different definition of "poverty" and "screwed" than most people.

I can't assume that there'll be a state pension by the time I come to retire in 20 years time or more specifically I can see that by having a reasonable private pension provision would make us ineligible to receive a state pension.

I did overstate it, but it looks like we're going to come up well short of a comfortable retirement. It won't be a disaster but we'll have to downsize to release some capital (if people are buying big houses in the future) to even get close to a £1m pension pot (which if we want an index-linked pension with transferable rights may get us £35k a year (around £20k in today's money)). I don't want to be in the position to have worked hard for 45 years, saved diligently and yet still not be able to afford to enjoy life.

 

[The Don]

Errm, I'm 49 and live what I consider to be an extremely comfortable life, with travel and entertainment pretty much whenever I want, and Governor Marley and I do not earn GBP 4K per month. What the hell kind of drug and hooker fuelled sybaritic excess do you need your retirement to be?

As noted above it's £50k in 2035 money, which is £30K or so in today's money.

We'd like 2 "proper" holidays a year - that's £6k including activities and spending money.

The house costs £6k+ a year to run properly.

Running a car is £3k a year (6,000 miles at 50p a mile), I'd like to be in the position to spend the same again on hobby cars.

If we join a golf club, that's £2k a year

So I've already spend 2/3 of our nominal income before eating or clothing is taken into account. It all adds up - very quickly.

 

[aggle-rithm]

Errm, I'm 49 and live what I consider to be an extremely comfortable life, with travel and entertainment pretty much whenever I want, and Governor Marley and I do not earn GBP 4K per month. What the hell kind of drug and hooker fuelled sybaritic excess do you need your retirement to be?

When you're old, you GOTTA have drugs and hookers. What else is there?

 

[Puppycow]

I just hope there's some kind of home for indigent old people.

I should at own my house by then but it may be too big a tax liability to keep.

 

[The Don]

When you're old, you GOTTA have drugs and hookers. What else is there?

And the sort of hooker that's willing to service an 80 year old doesn't come cheap

 

[Francesca R]

? Surely it is an 80 year old hooker struggling to stay out of poverty. Enjoy.

 

[GlennB]

We'd like 2 "proper" holidays a year - that's £6k including activities and spending money.

The house costs £6k+ a year to run properly.

Running a car is £3k a year (6,000 miles at 50p a mile), I'd like to be in the position to spend the same again on hobby cars.

If we join a golf club, that's £2k a year.

Is this parody?

For most, "poverty in retirement" means wearing woollen hat and gloves and huddling in front of a one-bar electric fire to stay warm in winter.

 

[DrDave]

I've not started to save for retirement yet. I have 2 plans, one is to win the lottery, the other is to die

 

[The Don]

Is this parody?

For most, "poverty in retirement" means wearing woollen hat and gloves and huddling in front of a one-bar electric fire to stay warm in winter.

No, I am genuinely concerned about being poor in old age but I was also trying to explain my aspirations for old age.

Aspiration

The lifestyle I described in the post which made you think I was indulging in parody. Unless something truly remarkable happens there's no way that we'll be able to afford that kind of retirement

Likely outcome

We will continue to plough as much as we can afford into long-term savings and pensions. I believe that this will mean that at the point where we come to retire that we will have a pension fund of £1 million. This will give a pension of around £35,000 a year which is under £20,000 in today's money.

This means that Mrs Don and I will have to downsize and will have a retirement where we will be fed and warm but where there will be little left over for enjoyment

Fear

That our investments will significantly underperform. Most of our pension money is in fairly conservative unit trusts (income and growth mainly) but there is a risk that the stock market could to a Japan and will be at 25% of its current value in 20 years time. This means we will have a pension of under £10,000 a year, £6,000 in today's money which does mean woolly hat and single bar electric fire.


I do not believe that we can rely on there being a state pension available under any of those scenarios.

 

[MRC_Hans]

We're planning on £50k as a retirement income, which is the equivalent of around £30k now (using the rule of 72 and assuming 3% inflation).

We assume that this will allow us a comfortable retirement, one where we will be able to take a couple of holidays a year, buy a car now and again, fund our hobbies (maybe we'll play more golf and I'll spend some money on our classic cars). We'd like to be in a position not to have to move out of our current home until we want to. Running that home is not cheap. Examples include:

• Council tax is currently running at just under £2k a year
• We've spent £1200 on heating oil this year, I can see that rising as we get older and need a warmer house
• We can easily spend £2,000 a year on the house, especially as I get older and may not be able to do some of heavier DIY myself
• Electicity is in the £500-£800 range annually and that's due to go up in excess of inflation

So just keeping the house going will cost over £6k a year, 1/5 of our planned retirement income.

OK, if "living on poverty" in your book means "being able to live as if you were still working", then I see your problem.

How about planning for a smaller house? (Judging from your heating expenses, it is either quite big, or outrageously poorly insulated) Presumably selling the old one will add to your funds, even if you need some of it on the new one.

... Seriously, I suspect you will have some trouble finding much sympathy for your situation.

There are also some upsides, when retiring:

- Time to shop for bargains.
- Make more of your food from the bottom (= cheaper).
- Travel out of season (= much cheaper).
- Skimp on house maintenance (after all, as long as it lasts your time ...).
- You don't need as new and reliable a car if you do not depend on it for commuting (and a car will last longer, with lower mileage).

- Oh and use up your funds. Face it, you will not live forever. Make a reasonable horizon. Should you significantly outlive that ... well that is a blessing in itself.

I'm speaking as someone planning retirement soon.

Hans

 

[OrangeCatz]

My wife and I have basically no retirement funds. I tell Mrs. OrangeCatz that at least we got to spend that money instead of losing it all to Enron.

I thought the only reason to have kids is so they will take care of you when you're old.

 

[Guybrush Threepwood]

Poverty in retirement is a very real fear for me.

....

The only hope that we have for even being able to afford to eat is that in addition to our pension pot we also have a rental property

As noted above it's £50k in 2035 money, which is £30K or so in today's money.

We'd like 2 "proper" holidays a year - that's £6k including activities and spending money.

The house costs £6k+ a year to run properly.

Running a car is £3k a year (6,000 miles at 50p a mile), I'd like to be in the position to spend the same again on hobby cars.

If we join a golf club, that's £2k a year

So I've already spend 2/3 of our nominal income before eating or clothing is taken into account. It all adds up - very quickly.

There seems to be some kind of disconnect between that first quote and the second, however I do understand what you mean. I would like to have a 3 storey solid gold, diamond encrusted mausoleum built to be buried in, and as things stand I have literally no idea how I will afford it.

 

[The Don]

OK, if "living on poverty" in your book means "being able to live as if you were still working", then I see your problem.

How about planning for a smaller house? (Judging from your heating expenses, it is either quite big, or outrageously poorly insulated) Presumably selling the old one will add to your funds, even if you need some of it on the new one.

The house isn't particularly large and it is comparatively (for the UK) well insulated. Our oil bill is about half of what our friends locally spend to heat their similarly sized houses. Oil-fired heating is just very expensive (likewise bottled gas) and we're not able to get mains gas out here.

I mentioned downsizing and it's something we may have to do to augment our savings but that supposes that in 20-30 years time we will be able to do so. Already this house is barely more expensive than the two-bedroomed apartment we rent out.

The problem about moving is that we like where we live. If financial necessity dictates that we have to move then that's what we'll have to do but after more than 45 years of hard work it will be a shame if we don't get to spend our dotage in the place we will have grown to love.

... Seriously, I suspect you will have some trouble finding much sympathy for your situation.

I wasn't looking for sympathy, I was trying to explain the size of the problem. If people are saving a couple of thousand pounds each month for their retirement in the expectation that it'll be a comfortable retirement then they are in for a big shock.

There are also some upsides, when retiring:

- Time to shop for bargains.
- Make more of your food from the bottom (= cheaper).
- Travel out of season (= much cheaper).
- Skimp on house maintenance (after all, as long as it lasts your time ...).
- You don't need as new and reliable a car if you do not depend on it for commuting (and a car will last longer, with lower mileage).

Good advice

• We already do shop for bargains, most of what we buy is short-dated and/or supermarket own brands
• All of our food is made from scratch, most of it using cheap cuts or meat or is vegetarian. The one extravagance is that when we buy meat, we insist on high levels of animal welfare so we buy less and we buy cheaper cuts
• We are fortunate that, having our own business, we already travel in low season. We take ski holidays in January or April, we don't tend to take a summer holiday but the couple of times we have it has been in October
• IMO skimping on maintenance is a false economy, especially if you're old. We can't be in the position of having a leaky roof, bad gutters, an ineffective boiler or draughty windows when we are older
• We live in a rural area with no public transport. If we stay here a reliable car would be more of a necessity than it is now

- Oh and use up your funds. Face it, you will not live forever. Make a reasonable horizon. Should you significantly outlive that ... well that is a blessing in itself.

I appreciate what you say but that sounds like a recipe for grinding poverty in old age. Currently in the UK funding care for the elderly is a huge problem that will only get worse.

£50,000 a year is not unheard of, £36,000 is the average

http://www.telegraph.co.uk/finance/personalfinance/7807967/Cut-the-cost-of-nursing-home-care.html

If you have anything other than nominal assets then you are expected to fund your own care. When the money runs out then you're placed into local authority care (if it's available) which I imagine is very distressing to old and vulnerable people

I'm speaking as someone planning retirement soon.

Hans

IIRC you live in Denmark, a country which currently provides a decent state pension and has excellent social infrastructure. You are also retiring after the best time to retire (which IMO was maybe 10-20 years ago - excellent occupational pensions, good life expectancy. My parents and Mrs Don's parents timed it perfectly) but before the so-called demographic time-bomb really explodes.


I am pessimistic about retirement but I am taking as many precautions as possible to minimise the risk. Unless something goes horribly wrong, Mrs Don and I will be much better off than the vast majority of those retiring at the same time as we are but still we will be looking forward to a modest retirement at best.