You may be keen to start learning new skills and exploring the world. Alternatively, as an expat, you may have had enough exploring the world and may be keen to settle in one place. You may have lost your job or may need to stop working due to health reasons. Or you may need to retire in order to care for loved ones.
Whatever your reason, the question that you have on your mind is “can I afford to retire?”.
The best way to look at this, is to break it into three scenarios – the best, middle and worst-cases.
The best-case scenario: You have enough saved to retire
In the best-case scenario, you will have sufficient funds with which to retire comfortably.
These funds will provide you with income to sustain your desired lifestyle throughout retirement.
How much is enough to retire?
Well, the amount that is needed to retire differs for different people. It will be based on factors such as your health, expected longevity, lifestyle, retirement country, and more.
If you are trying to determine how much money you will need to retire with, it is better to try thinking about it in terms of annual income instead of a big lump of cash.
One rule of thumb that I like to use is that, in retirement, you should aim to live on 80% of your pre-retirement income.
That is obviously a rough guide though and it will depend on your own circumstances.
If you expect to be a lot more active after retirement than before it, you may need more.
Similarly, if you are in poor health and in need of a lot of costly care, you may also need more.
If, instead, you expect to live the quiet life in retirement, especially if it is in a country with a lower cost of living, then you will likely need less.
Sources of income in retirement
When working out whether you have enough to retire, you should consider all of the sources of income that you can count on in retirement.
Typical sources of income for many people include State Pension, personal or employer pension schemes, dividends, interest on savings, annuity payments, and rental income from property.
If, for example, you determine that you will need £75,000 annually in retirement and you expect £9,000 per annum from State Pension and £33,000 per annum from an old employer pension scheme, that leaves another £33,000 in required annual income.
You can use the 4% rule to convert that into a nest egg by multiplying it by 25 (dividing 1 by .04, results in 25).
Doing so gives you an amount of £825,000 that you would need to have available to invest in order to bridge the income gap between what you can expect from pensions and the amount that you will need.
Don’t forget to take inflation into account. For many, State Pension and employer pension payments increase in line with inflation.
However, if you retire to one of the many countries where UK State Pension is frozen, then it will not be.
With regards to an employer pension scheme, if you have accepted a Pension Increase Exchange offer, then it will be frozen too.
In such scenarios, you will require additional funds to invest in order to make up the shortfall.
The medium-case scenario: You are close to having enough saved to retire
A common scenario for many people is that they approach retirement with almost enough money.
If that sounds like your scenario, then what can you do?
Well, the good news is that you have a number of options.
The simplest is to delay starting full retirement and continue to work at your current job.
This solution offers several benefits:
- It allows you to save and invest more money;
- Delaying taking anything out of your retirement fund to live on means that it will have a longer to grow, untapped;
- You will have to support yourself in retirement for fewer years.
You could also try semi-retiring for an interim period between full employment and full retirement. For example, you could use the knowledge and skills that you have acquired over the years to take on a consulting or freelance role.
Not only does this provide an additional source of income it also enables you to stay mentally active.
The worst-case scenario: You don’t have enough saved to retire
In the worst-case scenario, for whatever reason, you simply won’t have put enough money away to permit you to retire comfortably soon.
If it’s any comfort, you’re not alone: a significant number of workers have saved less than they need to for retirement.
So what can you do in this case?
Well, obviously, you will need to work for a few years longer than you may want. If you can, work all the way to at least age 70.
In reality, I expect this to become the norm anyway as average longevity has increased greatly over the years – the reason that Otto von Bismarck set the world’s first state pension to start at age 70, is that is when he expected people to die.
However, you could also think outside the box a bit too. If you have a big property and your children have flown the nest, you could downsize to release capital.
Alternatively, you could look to retire in a country where the cost of living is much lower so that your money goes further.
Retirement location is everything. If you retire in an expensive country like the UK or Switzerland, everything from housing expenses to groceries will take a big bite out of your retirement savings.
This is why it is important to make an educated decision on where you want to live out your golden years.
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▪️Ross has been a financial adviser for the past 26 years.
▪️He specialises in working with British expats over age 50 who are looking to optimise their finances for retirement.
▪️He is qualified as a financial adviser both in the UK, as a Chartered Financial Planner®, and in the EU, as a European Financial Planner®.
▪️Ross has been an expat himself for 22 years and currently lives in Warsaw, Poland with his wife and 2 children.