How long will my savings last?

By THIS IS MONEY
Updated:

 

How do I calculate how long my savings will last in retirement?
- ACR, Portsmouth

piggy bank calculator

Danny Cox, Chartered Financial Planner with IFA Hargreaves Lansdown, replies: You will have two types of need for your money, one is a need for income to meet your normal expenditure and the other is a need for capital, for example to buy cars or other expensive items.

Once you have set aside an amount for capital expenditure and then some for an emergency fund (say £10,000), the remainder can be used to provide you with income.

You should estimate what income you will need and then allow for your pensions. This will give you an annual shortfall that you should aim to achieve from your savings. If you take this annual shortfall as a percentage of your remaining savings, this will provide the target return.

For example:
Income requirement £5,000 per annum
savings £100,000
= 5% return.

If we take a simple example of investing the £100,000 into a monthly interest account, this could generate an income of £4,400 per annum after tax, based on a 5.5% gross return (assuming you are a basic rate taxpayer). This means that to meet your £5,000 requirement you need to spend £600 of your capital a year.

You also need to factor in inflation at around 3%, meaning that if you need £5,000 this year, you will need £5,150 next year and if interest rates remain the same, the shortfall will then be £750.

Ultimately you will get to a point where your savings are depleted.

There are many ways that your remaining savings can provide you with income. History tells us that the best way to invest for income and sustain your capital, is by using UK equity income investments. Of course, you have to be happy with the risk that your capital may fall in value.

The principle is that, over the long term, the value of the investments rise, so if you draw an income of 4% a year, you income increases to help offset inflation.

Ideally you should plan your income so that it can be easily met from capital and the capital has the opportunity to grow at the same time. In that way your savings should never run out. This question shows the benefit of good income streams from pensions at retirement.

There is no doubt that in my experience, those people with the best income streams through pensions, are always the most comfortable in retirement, regardless of their wealth. There is great comfort in income.

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