Stephen Barry, Specialist Financial Adviser at Wesleyan Financial Services, shares the latest retirement research from the Pensions and Lifetime Savings Association (PLSA)…
It’s one of the golden questions that a financial adviser will be asked – especially those who specialise in retirement planning for dentists, as it’s a particularly complex area to unpick.
However, the annual Retirement Living Standards (RLS) report released by the PLSA provides a very high-level overview of what kind of lifestyle you can expect with various income levels – which can help provide a starting point for how much you might need to retire.
The report is split into three separate living standards – a ‘minimum’ income that covers your basic living costs with a little left over for fun, a ‘moderate’ income that provides more financial security and flexibility, and, most likely the target for many dentists, and finally there’s the ‘comfortable’ income level which is considered to provide financial freedom and some luxuries to enjoy in retirement.
Predicted costs are rising
The latest report has presented a large jump in the required annual retirement income needed to meet each standard in the April 2021 – April 2022 timeframe*.
For those who would like to achieve a comfortable retirement, the threshold for a single person is £37,300 per annum (an 11.2% annual increase from the previous year) and £54,400 per annum for couples (a 9.6% annual increase). The annual percentage increase is even larger for those looking at the minimum and moderate thresholds.
From 2019-2021, the average annual increase was just 1.9% for a single person and 2.1% for couples looking at a comfortable retirement living standard.
What’s behind the 2021/22 increase?
Unsurprisingly inflation does come into play.
Interestingly, in the year until April 2022, each retirement living standard has increased more than the Consumer Price Index which grew by 9% over the same period. The RLS indicates this is down to the rise in the cost of domestic fuel which is a significant factor for what is needed in retirement in terms of essential expenditure.
It is important to remember, however, that the high inflation rates we are seeing that indicate the cost of living is predicted by the Bank of England to be at its peak and expected to fall later in 2023. This means that the findings for 2021-2022 could be an anomaly – next year’s RLS report should provide clarity on the permanence of this increase.
What does this mean for dentists?
As mentioned earlier, how much it costs to retire is a key question from dental clients to financial advisers. Unfortunately, there’s no one-size-fits-all answer to this question as it will depend on your personal circumstances. What might be suitable for your colleague, might not be right for you.
There are multiple factors at play – some are industry-specific as dentists potentially have multiple retirement provisions, from the NHS pension, a private pension, savings and investments, or even the sale of a practice to name but a few.
Then, dentists need to consider the change in expenditure in retirement. It is unlikely that your current expenditure will be the same as at retirement – perhaps you will have paid off your mortgage, or your children will no longer be financially dependent. Subversively, you might face increased costs if you are looking to support children with university costs, helping them buy their first home or other significant life stages.
Finally, and most importantly, you need to think about what kind of retirement lifestyle you’ll want to lead in retirement – will you be happy with a modest income that may impose some limitations on your lifestyle, or do you want the flexibility and freedom to do exactly what you want?
Seek advice from specialists
When it comes to finding out how much you need in retirement, taking part in regular reviews to look at your retirement provisions is crucial.
A Specialist Financial Adviser may carry out a cash flow analysis to look at how much you earn, what your expenditure is and what’s going to change in retirement. This should help provide you with an idea of how much it will cost. Book a no obligation financial review to speak to a Specialist Financial Adviser from Wesleyan Financial Services.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.
* Pensions and Lifetime Savings Association (PLSA)