Are you meticulously planning every detail of your retirement? It’s great to be prepared, but what if you’ve gone too far? In this video, we explore the signs that indicate you might be overprepared for retirement.

Please see below if you prefer to read the video transcript:

Introduction

Saving for your future is fantastic and I always encourage it. But today we going to be talking about when it’s the right time to hit the brakes on retirement savings.

I’ll guide you through a real-life retirement scenario to illustrate just how powerful it can be when done correctly.

Hey, everybody, I’m Simon Alexander, founder of Streamline Financial Planning. I help people secure their desired retirement lifestyle, without the fear of running out of money.

Much is said about people not saving enough for retirement, and that’s a valid concern. Yet, what often goes unnoticed is that some people are overly ready for retirement.

Now, being well-prepared is generally a positive thing, but if it comes at the expense of your current lifestyle. That’s where we might need to reconsider.

Today, I’ll walk you through an example to highlight the impact of understanding the right duration for saving and when it makes sense to hit the brakes on retirement contributions.

Risk Warnings

Before we get into the video, I would like to make it clear that this video is for educational purposes only and should not be construed as financial advice or recommendations.

Please take the time to read the following risk warnings. They will also be pooping up throughout the video. In addition, I have also included them in the description below.

But in summary, if you are unsure before making a decision around your financial situation, I strongly encourage you to seek professional advice from a qualified independent financial advisor.

Introduction to Case Study

Let’s dive into a real-life example to illustrate this point. Allow me to introduce you to a couple, John and Jane Doe. I have altered their names and figures slightly for confidentiality.

When John and Jane sought my guidance for retirement planning, what caught my attention was their disciplined financial habits. They were the ideal couple. They are dedicated savers, leading a modest lifestyle, and making smart investments with a substantial portion of their income.

Essentially, they were ticking all the boxes when it comes to building wealth for retirement.

However, they were one aspect of their planning that raised some concerns. And this is something I will highlight a bit later in the video.

Current Financial Situation

First of all, John is 60 and Jane is 58. When they came to me this is how their investments looked:

A joint bank account with £75,000. They both had Stocks & Shares ISAs. John’s value was £225,000 and Jane had £265,000. And they both had defined contribution pensions. John had £700,000 and Jane had £125,000.

With regards to their home, it was valued at £500,000 and they had no mortgage.

So, the Net total assets was £1,890,000.

John was still working and contributing into his workplace pension – this being 5% employee with a 5% employer match. Also, they are maximising their ISA allowance each year by contributing £20,000 each into their ISAs.

In fact, they are saving and investing the majority of their income with little left over at the end of each month to do the things they really want to do such as spend time with family and go travelling. We will address this in a bit later in the video.

Retirement Goals

After discussing their financial situation, our next focus was on their retirement goals. We discussed what is the purpose and meaning of the investments they have accumulated. And what matters most to them.

John was dedicated to his job and was earning £160,000 per year. Despite its occasional stress and long hours, he wasn’t looking to retire early. His target retirement age was set at 67, aligning with the start of the State Pension.

On the other hand, Jane, a former professional who chose to stay at home after the arrival of their two children, who are both now financially independent.

In summary, the goal was to retire when John turned 67 but to also enjoy life along the way. And as they children are financially set, they are not too concerned about leaving them anything at the end of their lives.

Retirement Expenditure

We went through an expenditure exercise and itemised and broke down what they would like to spend in retirement. And we came up with a figure of £4,000 per month – which is in the region of what they are spending now. This is their essential expenditure.

They would also like to spend an additional £10,000 per year on holidays from the age of 67 to 77 – a 10-year period. We call this their retirement lifestyle expenditure.

Now another expenditure that we factor in is Long Term Care. We are making some big assumptions here, but we are going to say that both John and Jane will enter long term care during the last 5 years of their life. More specifically, residential care of £3,904 per month each from age 90 to 93 and nursing care of £5,291 per month each from age 94 to 95. You may be thinking were did I get these figures from. Well, I used an online calculator on the Paying for Care website. I have added the link below.

Retirement Values

When going through the facts and figures with John and Jane they made a one-off comment saying, ‘we would love to spend more time with our children and grandchildren’.

However, they explain that they feel they don’t have enough money or time to do it.

Current and Future Income

We have spoken about John’s income which is £160,000 per year. But what about other sources of income.

In the future, they have State Pension income – which is a guaranteed, inflation linked income that starts from age 67. For the purposes of this case study, John and Jane have both contribute the maximum 35 years of NIC and are entitled to the full State Pension. The current state pension is £203.85 per week or £10,600 per year.

Cash Flow Projection

So, what we going to do for John and Jane is project out. We going to determine if they are on track to reach their goals and retire at the age of 67 while spending what they want to spend on essential costs plus travel and even factoring in the high costs of long-term care at the end of their lives.

But in order to project out, we need to determine how long John and Jane will live for and how long the pensions and other investments have to last for.

We are improving medicine and technology; life expectancies are increasing. Based on the ONS Life Expectancy calculator, a 60-year-old male has an average life expectancy of 84 and a 1 in 4 chance of reaching age 92. A 58-year-old female has a 87 average life expectancy and a 1 in 4 chance of reaching 94.

To be conservative, and keep it a round number, we have assumed John and Jane will live to the age of 95. We would much rather plan for a little bit longer life expectancy, especially if you’re in average or above average health.

Cash Flow Investment Returns and Inflation

And you may be wondering what growth rate we are using. It has been assumed that the expected rate of return is 5.44%.

Expected rate of return is calculated as the weighted average of the estimated returns of each asset class in a given portfolio. This return of 5.44% is gross and is before normal costs associated with investing such as tax, fund management, adviser and custody costs.

It is important to note that there is no guarantee that the expected rate of return and the actual rate of return will be the same. The sum of the past can give us an indication of future returns, however, Streamline Financial Planning offers no opinion on future returns rather, for the purposes of these cash flow forecasts, we use a range of estimated returns for each asset class for various reputable sources and select a value at the conservate end to use as the ERR.

Following that, you may be wondering what inflation, and the costs of the investments is.

Well, I have used an inflation rate of 2.2% and the costs of their investment portfolio, being the pensions and ISAs, is 1.35%.

Value of Investments during Retirement

Retirement Score and Available Investment Chart

So, if they kept doing what they are doing and contributed into their investments for another 7 years, here are some of the key retirement outcomes:

Their retirement score is 133%. This indicates a very healthy position for John and Jane. In fact, it indicates that they can very likely fund each year of their retirement and have surplus wealth at the end of their lifetime.

This chart demonstrates it well. The chart is called the ‘Available Investments Chart’ and shows the available liquid investments that John and Jane have over the projected timeline. On the X axis we can see that it starts at the beginning of the plan (which is today) and ends in 2061 when they are 95. The Y axis illustrates the value of their combined liquid investments such as cash, pensions and ISA – it excludes the non-liquid assets like property.

During retirement, the straight line indicates that the withdrawals from the portfolio are sustainable. The investment returns are sufficient to keep growing the retirement portfolio and for John and Jane to continue making the withdrawals to fund their retirement. In fact, the graph keeps increase during retirement indicating they are accumulating wealth each year until the reach long term care at age 90 where the high costs of residential care and nursing care start.

Another way to look at this is the retirement cushion – which is 7 years. This is the number of years that any remaining investments will last past the set life expectancy.

This is assuming that John and Jane continue to make ISA contributions of £20,000 per year and John receives workplace pension contributions.

Also note that this assumes the annual growth rate of 5.44% per year – so every year they get the same return. As you probably know, this will never happen in real life. Investment returns vary every year. We will address this in a bit.

So, what do they have at the point of retirement? Based on the assumptions, they would have a future value of just over £2.1m.

This is step one, as we need to identify how much the future portfolio will be at retirement in order to fund their retirement lifestyle.

But what else this chart illustrates is that when they do retire at age 67 and start drawing on their investments to fund their retirement, there investments will continue to grow each year illustrated until they reach at 90 when the high costs of long-term care start. We can see that they will then require more from their portfolio to fund these costs towards the end of their life.

Why is this the case? Well, I want to show you another chart.

Detailed Income Projection Chart

Here is a detailed income projection chart. This chart illustrates the income sources of the projected timeline. So, each bar chart represents one year and is split up into the different sources of income. For example, we have the earned income (salary), ISAs, pensions and State Pension.

John’s state pension starts at the point of retirement, age 67, and two years later Janes state pension also starts. What does this mean? It means that they are in receipt of guaranteed, inflation linked income.

This means that they don’t rely entirely on their invested portfolio to fund their retirement.

We can see that towards the end of the projected timeline, that the bar charts are higher indicating that they will require more from their portfolio to fund the expenses of long-term care.

Volatility Analysis

Now as I said earlier, we are using an expected return rate of 5.44% per year. The projections have taken this into account and have assumed that John and Jane will receive this return rate every year.

But that is unrealistic. We know that we would never receive a guaranteed return each year. So, what I am going to do is run a volatility analysis.

This is an assessment of how sensitive the plan may be to return rates varying over time.  The plan is run through 1,000 market simulations with return rates varied each year.  Each bar represents one year and illustrates the chance of success of John & Jane having enough money to cover expenditure in that particular year. 

What we can see is that John and Jane have a really good chance of success and therefore not running out of money in retirement. Another way to view this is the likelihood of them having to make adjustments in retirement such as taking more risk, working long, reducing expenditure for example but based on this analysis and their current situation they will be absolutely fine.

What If Scenarios

Lastly, I want to test their plan against certain ‘what if’ scenarios. These are additional stress test scenarios that help us to see how their retirement goal would be affected in various situations.

What If Scenario – Market Crash

The first ‘what if’ scenario I want to look at is the ‘market crash’. The market crashes simulate a general market downturn of 30% and subsequent four-year recovery. I have timed this market crash to happen a year into retirement.

What we can see that John and Jane will have enough investments during retirement, in fact, it may not be determinantal to their retirement plans if a market crash had to happen then.

What if Scenario – High Inflation

The second what if scenario is higher inflation. Now we have assumed an inflation rate of 2.2% during the projected timeline. This scenario assumes an increase of the annual inflation rate from 2.2% to 3%. Again, the cash flow forecast illustrates sufficient liquid assets over the course of their life.

Absolutely important to mention that these aren’t the only “what if” scenarios. In my client interactions, I delve into more intricate details, considering factors like lower investment returns, increased longevity, and the potential impact on the surviving spouse in the unfortunate event of an early passing.

Overall Sustianability of the Plan

After viewing their current situation, you should ask the question, ‘is their plan sustainable?’.

Can they afford a retirement lifestyle of £4,000 per month (£48,000) and spend an additional £10,000 per year on holidays for the first 10 years?

The answer is yes. In fact, they have surplus wealth at the end of their lifetime.

However, you may consider them to be too prepared as they have accumulated more than enough. They not particularly enjoying life now as they are saving the majority of their income, and they really are just counting down the days to retirement in 7 years’ time.

Applied Financial Planning Strategies

Going back to what they value – which is spending time with family now. We spoke about the good work that they have done up to this point. What if they did not have to work so hard and save so much time. They need to think about it as years they can’t get back.

So, we discussed the following strategy:

• Work is now optional for John. He enjoys working but he can do without the long hours and commute every day.
• For that reason, he is going to semi retire in 2 years’ time. His current employer will allow him to reduce his hours. Therefore at age 62, he drop down his working days from 5 to 3 days.
• This means that in two years’ time his salary will reduce from £160,000 to £90,000. He will continue working until the age of 67.

There are many positives to this strategy. First of all, John continues to work, it is something he enjoys and by semi retiring and reducing his hours he can take a more phased approach to retirement. He will also continue to benefit from workplace pension contributions.

They will also stop their ISA contributions in two years’ time. Freeing up surplus income to go travelling and spend on family.

Now you may be wondering that they could be doing other things to improve their situation – which we did do as part of their financial planning exercise. Such as lowering the cost of their portfolio, tweaking their investment portfolio, and implementing a tax-efficient withdrawal strategy during retirement, for example. But for the purpose of this video, I have kept it simple to illustrate my point of identifying when you have enough for retirement and enjoying life now.

I’ve integrated this strategy into our cash flow system. When I press this button, the line chart will show a comparison to their current plan. This helps us see how it’ll affect their current finances.

You can see that by John semi retiring, they will still have wealth at the end of their time and don’t experience any shortfall. It does not put their overall retirement plans in jeopardy and in fact they still have a retirement cushion – some liquid assets at the end of the projected timeline.

You can say that this is getting the best of both worlds. They have freed up some of their time to spend with their children and John continues to work part time.

Going back to the Volatility analysis, and as we previously discussed, this is an assessment of how sensitive the plan may be to return rates varying over time. This chart illustrates that they will still have a high chance of not running out of money during retirement.

We can see that by them making the proposed changes, they will still have significant wealth and the chances of them running out of money during retirement are low.

The bottom graph identifies the range in the size of impacts to goal progress and net estate. We can see that the middle result is 109% which is a good outcome. It essentially means the probably of John and Jane having to make big regular adjustments in retirement such as reducing expenditure, going back to work, taking more investment risk, are very low. This should help give them peace of mind that they will be ok!

Retirement Lessons from John and Jane

John and Jane’s story is a great example of how to build wealth for the future. One of the key takeaways from their experience is to start saving early. This is because of the compounding effect of investment returns over the long term. By investing early, you can benefit from the power of compounding, which can help you build wealth over time.

Another important lesson from John and Jane’s story is the importance of discipline. Being disciplined with your finances can help you stay on track and achieve your financial goals. It’s important to be prepared and have a plan in place. It can help that you make the most of your financial resources.

But importantly, to identify how much you need to have to life the life you want in retirement and also to enjoy life now.

Retirement Questions to Ask Yourself

As always, I encourage you to think about these four questions:

• How much do I need to save up for retirement?
• How long will my money last?
• How do I pay less in taxes?
• If something happens to me, will my family be ok?

But lastly, how do you prepare yourself for a successful retirement but also enjoy life now.

Once again, I’m Simon Alexander, founder of Streamline Financial Planning. If you have any questions about your retirement be sure to get in contact.

Thanks for watching.