Many dream about retirement to pursue their dreams of travelling, spending more time with friends and family and generally relaxing after decades of working long hours and putting up with impossible bosses.
What is usually missing in this daydreaming process is the reality that only money and good health can make this dream come true.
Long-term financial planning is notoriously tricky, not just for businesses but also for individuals, who in most cases currently spend almost a quarter of a century in retirement.
One gold standard that many wealth advisers stick to is to recommend to their clients a portfolio of financial assets of almost €1 million to ensure their quality of life does not deteriorate when they leave work. This figure is very arbitrary, as we all have very different expectations of what we need to live happily.
What is a certainty is State pensions are never enough to guarantee a comfortable life in retirement. In the US about a third of workers do not save enough even for a modest retirement income. In Europe, the situation may be even worse. Many naively hope that politicians cannot afford to upset them by not guaranteeing them a decent pension on retirement.
The wise will consume less today and save more
I am almost sure once politicians decide not to increase the pensionable age and tie it to longevity, and make retirement savings mandatory, many will risk severe financial problems when they retire. What is in store for us is, and will always be, a mystery. What if we suddenly fall seriously ill and need treatment abroad? What if we have to support a son or daughter who needs us financially to survive? What if you or your partner needs expensive long-term care because of a debilitating condition like dementia?
Morbidity increases with age, and there is not much we can do about it except building financial buffers to cushion the cost of dealing with debilitating conditions. If we are lucky and are spared such grave health problems, it is legitimate to expect our quality of life not to deteriorate when we retire.
This logic may sound perfectly reasonable for many, even if good financial advice on how to prepare for financial freedom will never come from politicians. The stark truth is that people have to self-fund retirement and the enormity of this challenge is underestimated.
Various studies show that most people usually start to think about building a nest egg for retirement in their late 50s, when it may be too late to guarantee financial freedom as a pensioner.
In the UK the Pensions and Lifetime Savings Association (PLSA) warns more than half of those who will retire in the coming decade and beyond risk a substantial fall in their quality of life. Rather than produce statistics and ratios in technical reports that are meaningless to most readers, they advise those still working to set lifetime targets for their retirement.
One of their reports defines three lifestyle targets that should cover the expectations of most people: comfortable retirement, modest retirement and basic retirement. The PLSA describes graphically what one can expect to achieve under each of the three retirement options, which will, of course, depend on how much people are prepared to save in their working lives.
A comfortable retirement would enable you to have a long-haul holiday every year, regular meals in a good restaurant, frequent opportunities to socialise, and the ability to buy the latest electronic gadgets.
A modest retirement would probably allow you one or two short European city breaks, occasional shopping holidays and eating out in modest restaurants.
A basic retirement lifestyle would permit a retiree to spend a day at some local resort, enjoy the occasional takeaway pizza or hamburger, and shop at discount stores.
Considering that most young families spend more than 100 per cent of their net income to repay their mortgage, take an occasional holiday abroad and pay for their children’s education, aspiring to a comfortable retirement does not come without strict financial planning.
A retirement pipe dream can turn into a nightmare as the countdown to financial freedom approaches. Far too many people will give up on their goals and continue to work until they drop, as they cannot afford to retire. Others will give up on life’s little luxuries like travelling abroad for a long weekend.
The wise will consume less today, save more and achieve their retirement dream.
johncassarwhite@yahoo.com