Are you approaching retirement and wondering ‘can I retire?’ In this video we analyse a real-life case study featuring Steve and Susan Doe, both 60 years old and are asking ‘can I retire?’. We talk about the importance of preparing for retirement, lowering costs & charges, implementing a tax-efficient withdrawal stategy and the importance of taking a phased retirement approach.

Here is the video script:

Case Study Introduction

So, you have just turned 60 and have saved up £500,000 in your portfolio and now you are asking yourself ‘can I retire?’. Just because you have reached those milestones, it may not mean you ready for retirement just yet. In today’s video, I am going to walk you through a case study and answer some critical questions. 

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

Risk Warnings

Before diving into the video, it’s important to emphasize that this content is meant purely for educational purposes. Please understand that it should not be considered as financial advice or recommendations.

Take a moment to review the risk warnings, which will appear periodically during the video and are also provided in the description below. To put it simply, if you ever find yourself uncertain about a financial decision, I highly recommend seeking guidance from a qualified independent financial advisor.

Introduction to Steve and Susan

Let’s get started and dive into a real-life example. Allow me to introduce you to a couple, Steve and Susan Doe. As always, I have changed their names, details and account values for privacy reasons, but this is a very common client case we come across at Streamline Financial Planning.

Case Study – Current Financial Situation

First of all, Steve and Susan are both 60. When they came to me this is how their investments looked. They had £25,000 in a joint savings account. They both had stocks & shares ISAs worth £68,000 for Steve and £44,000 for Susan. As well as defined contribution pensions worth £265,000 for Steve and £123,000 for Susan. They owned their own home worth £625,000 without a mortgage.

So, in total their total net worth was £1,150,000.

Costs & Charges

Steve and Susan were already clients of a big national wealth management firm for their financial planning needs. However, they were taken aback to learn that the total charges, encompassing product, investment, and advisor fees, for their ISAs and pensions amounted to 2.45%.

Feeling dissatisfied with the perceived lack of value from their current financial advisor, they discovered that a total charge of 2.45% was regarded as high. Managing costs is within our control and it’s crucial to ensure that the fees paid reflect the value received. I will address this a bit later in the video.

Case Study – Retirement Goals

After exploring their financial situation, our next focus was on their retirement goals. Although they’re currently employed, they approached us with a key question – “Can we retire right now?”

Their thoughts on retirement activities are somewhat open-ended; they simply want to determine if they’ve amassed enough to retire immediately. With no children or financial dependents, their goal isn’t to leave behind wealth; in fact, they aspire to have nothing left when they pass away.

In this video, we’ll delve into exactly that. Let’s consider a scenario where both Steve and Susan cease working today, exploring the available options to turn their retirement aspirations into a reality.

Case study – Retirement Expenditure.

We went through an expenditure exercise and itemised and broke down what they would like to spend in retirement. And they came up with a figure of £2,500 per month. This is their retirement essential expenditure.

They would also like to spend an additional £5,000 per year on holidays from the age of 60 to 75 – a 15-year period. We call this their retirement lifestyle expenditure.

All the expenses will increase each year by the rate of inflation. You can see here:

Now, let’s consider Long-Term Care. We’re making some assumptions, projecting that Steven and Susan might need care during their last 5 years. From ages 90 to 93, residential care could be around £3,904 per month each, and from ages 94 to 95, nursing care might cost about £5,291 per month each. I used an online calculator on the Paying for Care website to estimate these figures. Link in the description below. Again, these long-term care figures are today’s values and will be adjusted with inflation each year.

Case Study – Retirement Spending Curve

In retirement, people’s spending typically follows a pattern.

Early in retirement, expenses may be higher as individuals pursue activities they’ve postponed during their working years. This is often referred to as the “go-go” phase. With Steve and Susan, the are planning on spending that additional £5,000 per year on holidays. They understand that they are still relatively young and want to make the most of their retirement while they are still active.

As retirees get a bit older and settle into a more relaxed lifestyle, spending might stabilize during the “slow-go” phase. With Steve and Susan, they may enter the ‘slow go’ phase around age 75 when the travelling is expected to stop.

Later in retirement, retirees may get too old to be active and they enter the ‘no-go’ phase. Generally, in this phase, regular lifestyle expenses drop but health-related costs may increase causing a spike in expenses. Again, we have factored this in for Steven and Susan as they enter long term care at age 90.

It’s crucial to anticipate these phases when structuring your financial plan.

I wrote a blog on this which can be found in the description below: The Retirement Life Cycle – Streamline Financial Planning (streamlinefp.co.uk)

Case Study – Income

With regards to income, Steven’s current salary is £75,000 and Susan’s salary is £77,000. Remember, they would like to know if they could retire now, so we not going to include their salary’s going forward. But what about other sources of income?

Well, 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, Steven and Susan have both contributed 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.

The State Pension also increases in line with inflation each year. You can see this here:

So, you may notice that as Steven and Susan are age 60, they will only start receiving their State Pension at age 67. What does this mean? Well for 7 years, from age 60 to age 67, they will be fully reliant on withdrawals from their pensions and ISAs to fund their retirement expenditure. I will demonstrate this to you a bit later.

Case Study – Projection

So, what we going to do for Steven and Susan is project out. As with most of the cash flow forecasts, I have assumed a life expectancy of age 95.

As selling their property is out of the question, we are going to determine if they have enough liquid wealth in pensions and ISAs, which currently totals £500,000, to fund a 35-year retirement – from age 60 to 95.

Case Study investment returns and inflation

When constructing a cash flow forecast, it’s crucial to consider assumptions regarding investment returns. After all, the growth of investments plays a significant role in safeguarding the retirement fund from premature depletion. We’ve based our calculations on an expected rate of return of 5.60%.

The expected rate of return, at 5.60%, is an average of estimated returns from different assets in the portfolio. Keep in mind, this is before common investing costs like tax, fund management, adviser, and custody fees.

It’s crucial to understand that the expected and actual returns might not match. While past performance hints at future returns, there’s a consensus among economists and regulators that future returns may not be as generous.

At Streamline Financial Planning, we don’t predict future returns. Instead, we use conservative estimates from reputable sources for cash flow forecasts.

And for the inflation rate, we have used a figure of 2.2%.

Case Study – Value of Investments at Retirement

So, if Steven and Sue had to retire today, here is what it would look like:

Their retirement score is 59%. It indicates that they are likely to run out of funds during retirement. This is the percentage of total funds needed that are expected to be available at the start of the planned retirement. So, in other words they would need another 41% more funds at the start of their retirement (so at age 60) to not run out of money.

Another way to look at this is the retirement shortfall – which is 5 years. This is the number of years that Steven & Susan will experience a shortfall where investments for retirement will not be sufficient up to the set life expectancy, in the plan, which is up to the age of 95.

But why the shortfall? Surely you must think that with £500,000 is more than enough to retire at age 60. Well, this chart demonstrates it well. The chart is called the ‘Available Investments Chart’ and shows the available liquid investments that Steven and Susan 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 2059 when they are 95. The Y axis illustrates the value of their combined investments such as cash, pensions and ISAs – it excludes the non-liquid assets like property.

We can see that when they retire, they are more reliant on the liquid investments, illustrated by a decline in the line until age 67 when the State Pension starts. At this point, they are less reliant on their pensions and ISAs to provide an income, however the line continues to decline over the course of their retirement. The line indicates that the withdrawals from the portfolio are greater than the net investment return of the pensions and ISAs.

BUT, when they get to age 90, there is a sharp decline in their liquid investments – in fact all of their investments are depleted a year later. This is the result of the high costs of long-term care. The red line indicates that they would be required to take on debt to fund their ongoing costs for the remainder of their life. Now, they do have a last resort back-up plan which is to sell their property before they enter long term care. This can release liquid wealth to pay for the ongoing expenses. However, this is their family home which they have had for years, and as mentioned earlier there is no plan to ever sell this property.

But what if they didn’t go into long term care? Let’s have a look at the chart if I remove the long-term care costs:

By eliminating the substantial expenses associated with Long-Term Care, Steven and Susan’s retirement outlook has increased to an impressive 97%. This indicates that they now possess sufficient liquid wealth, or just about, to comfortably navigate through their retirement years. The improvement is significant, making their overall retirement picture much more reassuring.

You might consider including the costs of long-term care as overly cautious. Factoring in such expenses could potentially lead Steven and Susan to adopt a frugal approach in retirement, prioritizing future expenditures that are decades away. This cautious approach may inadvertently hinder them from fully enjoying the retirement lifestyle they aspire to. Additionally, the need for long-term care might not even materialize, either due to a shorter lifespan or the absence of such care requirements.

However, as we discussed earlier, I’ve included long-term care costs because I believe preparing for this expense is a necessity, ensuring a comprehensive and realistic approach to retirement planning. So for the rest of the video I have included the costs of long term care.

Now moving on, I would like to show you another chart.

Here is a detailed income projection chart:

This chart illustrates the income sources over the projected timeline. So, each bar represents one year and shows the different sources of income generated to cover the expenditure in that particular year.

For example, we can see the withdrawals from the ISAs and pensions as well as the payments from the State Pension.

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

And that’s where the red bars occur.

The big red bars indicate an income shortfall. This means they do not have enough liquid assets to cover their ongoing expenses. The shortfall occurs towards the end of their life, more specifically when the high costs of Long-Term Care start.

But let’s have look at the beginning of the timeline, when Steven and Susan have now retired at age 60. They require some big withdrawals from their pensions and ISAs to fund their retirement expenses. These withdrawals last until age 67 when their State Pension kicks in – the brown parts of the bar illustrate the inflow of the State Pension each year.

To put numbers to this, they would require a withdrawal rate in the region of 7.7% per year from age 60 to 67. This would be considered a high withdrawal rate, and some may say not be sustainable for the long term. This is because that after the investment returns of 5.60% and then accounting for the portfolio costs and inflation, by withdrawing around 7.7% requires selling down capital of the portfolio and overtime will likely result in depletion of the accounts.

But when they reach the age of 67, they start receiving their State Pension. This means they not fully reliant on their investment portfolio to generate an income in retirement. The portfolio withdrawals are reduced from7.7% to 4.8% which is still higher than the net investment returns.

Case Study – Volatility Analysis

As mentioned earlier, we’re basing our projections on an expected return rate of 5.60% annually. However, in reality, receiving a consistent guaranteed return each year is unlikely. The returns will fluctuate each year.

To address this, I’ll conduct 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 Steven & Susan having enough money to cover expenditure in that particular year.

So, each green bar illustrates 75% or above of trials in that particular year were successful. So we can see that at the start of their retirement up until age 79 they have a really good outcome and the chances of them not running out of funds before the age of 79 is very high.

The yellow bar charts indicate when the trials were less than 75% but above 60% were successful. So between the ages of 80 and 84 the outcome is looking less good for Steven and Susan.

And finally, the red bars illustrate less than 60% of the trials in the year were successful. Again, the outcome doesn’t look good and the chances of them running out of money are high.

In terms of actual percentage chances, the Range of Goal Progress graph illustrates the variability in overall goal progress across 1000 trials. Currently, Steven and Susan have a 56% likelihood of achieving a successful retirement without running out of money. While a 56% chance may be perceived as relatively low, the optimal target should ideally be above 85%.

To provide another perspective, this translates to a 42% chance of needing to make significant adjustments during retirement, rather than a 58% chance of financial success. These adjustments might involve returning to work, cutting back on retirement expenses, selling property to generate funds, or taking on higher investment risks. These are just a few potential adjustments, providing a glimpse into the possible scenarios they might encounter.

Case Study – Sustainability of plan

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

Can they afford a retirement lifestyle of £2,500 per month (£30,000) and spend an additional £5,000 per year on holidays for the first 10 years?

The answer is no. They are going to have to make some changes in order to have a successful retirement.

Case Study – Strategies / Planning

So, we discussed the options available with Steven and Susan and we came up with a strategy:

Reduce Costs

Our initial strategy involved a comprehensive review of their existing pensions and ISAs. We discovered that their retirement portfolio incurred substantial costs amounting to 2.45% per annum. Consequently, we recommended a shift from their current financial adviser to a modern, flexible, and cost-effective platform. We also advised them to invest in a globally diversified, low-cost portfolio tailored to their risk profile.

With their current portfolio valued at £500,000 and total annual charges of 2.45%, they were spending approximately £12,250 annually. Through working with Streamline Financial Planning, we successfully lowered their charges to 1%. This resulted in a significant saving of £7,250 per year.

Upon implementing this strategy, their retirement score, as shown in the line chart, showed a notable increase. By reducing the costs of their portfolio, they now save around £7,250 annually, elevating their retirement outlook to 66%. This underscores the importance of scrutinizing overall costs, as it can have a profound impact on your long-term financial well-being.

Phase Retirement

Retirement is long. Our projection assumes a retirement of 35 years! As they have had no preparation for retirement, it was suggested that they take a phased retirement approach. This means that they reduce their hours over the course of the first 5 years of retirement. In this cash flow we have assumed that they would cut their hours by 50%.

When I press this button we will see the impact on their retirement outcome compared to their current situation.

We can see that by Steven and Susan working part time, they delay accessing their retirement portfolio by 5 years. This means a further 5 years of investment growth and more wealth in their pensions and ISAs. We can see this by a further increase in the line chart and that their retirement score has jumped up to 97%.

Extending the working years by an additional 5 might feel like a significant stretch. Particularly for those eager to retire promptly. It’s essential to shift our focus not only on what we’re retiring from but also on what we’re retiring to. The preparation for retirement is a gradual process, taking months, and at times, years.

Opting for a phased approach to retirement allows Steven and Susan to leverage the added working years not just for financial benefits but also as a valuable period to initiate the preparations for their retirement lifestyle. This thoughtful approach ensures a smoother transition and a more fulfilling retirement experience.

Withdrawal Strategy

The third strategy that I have applied is incorporating a tax-efficient withdrawal plan. This will allow Steven and Susan to manage the withdrawals from their portfolio in the most tax effective way. After all, we have worked so hard to get to the point of retirement, we don’t want to being paying any unnecessary taxes.

This make the retirement score jump up to 101%.

Overall, by applying these three strategies, you can see the line chart has increased over the projected timeline. In fact, it looks like they will just have enough money to last their lifetime. This was their objective.

Returning to the Volatility analysis. 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.

You can see that that more years have 75% or higher successful trials compared to the current plan. Towards the end of the projected timeline this reduces shown by the yellow and red bars. Again, this is where the big risk is for them. This is due to the high costs of long-term care and the fact they are eating into their liquid wealth at this point to cover the costs. But overall, this looks a lot better than their current situation.

Lastly, when we examine the Range of Goal Progress graph in terms of actual percentage chances, it vividly displays the variability in overall goal progress across 1000 trials. Presently, Steven and Susan stand at a 56% likelihood of achieving a successful retirement without facing financial challenges. However, by implementing the strategies of cost reduction, extending their working years by 5, and adopting a tax-efficient withdrawal plan, this likelihood significantly rises to 94%.

To put it differently, this shift translates into an 6% chance of needing to make significant adjustments during retirement. As opposed to a robust 94% chance of financial success. This implies an 6% probability of returning to work, trimming retirement expenses or taking on higher investment risks. Overall, this outcome should bring them considerable satisfaction and confidence, as the likelihood of running out of money is notably low.

Lesson of Case Study

Steve and Sue’s journey highlights the importance of holistic retirement planning. While they successfully accumulated wealth, their story underscores the risk of neglecting crucial aspects of their financial plan.

A key lesson is to avoid procrastination in retirement planning. It’s not a last-minute task; instead, it’s a gradual process that requires years of preparation. Planning well in advance ensures a smoother transition into retirement.

Reducing costs is vital. Always ensure you understand how much you are paying in percentage and monetary terms. It is up to you to determine the value you receive from your financial adviser is worth some multiple of the fee.

Moreover, retirees often emphasise what they are retiring from without considering what they are retiring to. With retirement potentially lasting 30 years or more, it’s essential to not only have a financial plan but also to think about how to spend this significant phase of life.

Lastly, adopting a phased approach to retirement is valuable. This could involve gradually reducing working hours and days. Maintaining some level of work provides a sense of purpose and belonging. It also fosters social connections, and keeping individuals active and engaged. This approach contributes to a more fulfilling retirement lifestyle.

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 or visit us at www.streamlinefp.co.uk. Thanks for watching.