12 Apr 2011, 10:27am
personal finance reflections:
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  • What is your number? How much do you need to live on?

    I swiped some of the title from this thread on Money Saving Expert, which is about how much you need to live on in retirement. Don’t start reading the thread from the beginning, because there is a lot of bad humour and flame wars to start off with. The link I’ve posted gets you past the worst of that, and all credit to the OP for persevering in the face of adversity!

    It was an interesting tale, as it was the estimation from a whole bunch of real people independently trying to estimate how much a couple would need to live on in retirement. Clearly there will be a range of responses, but there was a surprising commonality eventually settling on around £27,500

    The £27,500 can be broken down into:
    Food £6,000
    Car/Transport £5,000
    Bills/Utilities £5,000
    Holidays/Leisure £6,000
    Clothing/Cash/Other £3,000
    Repairs/replacements £2,500

    This figure is predicated on a owner-occupier couple who have paid off their mortgage and have no dependents living with them. This figure is roughly corroborated by real retirees living off a similar amount; in practice real retirees seem to be able to shave a little bit off their estimates.

    Although hard to express analytically, I get the feeling that those posters who have had children (ie those mentioning DD, DS in MSE-speak) are at the lower end of the Number targets, the child-free at the other end. No huge surprise there, I suppose 😉

    Something that surprises me is that for a single person the costs are only a little bit less, there seem to be significant economies of scale for couples. I operated a household as a single person for over a decade early in my career, I wonder if perhaps this set me back more than the extra cost of having children, as when I compare myself with my colleagues they tend to live in slightly more fancy houses, although they are often still carrying a mortgage at the same age.

    Poster Loughton Monkey made the good point that you can overcook focusing on how much you need to retire. His alternative, which is closer to the ERE approach is to drive your running costs to below your income, which is broadly how I do it. I then save the excess. There is more drama in my approach, particularly now where I am saving > 70%, but LM has been more consisent throughout his working life. Slow and steady wins the race, fortunately I also have the benefit of a company pension scheme to keep me in the slow and steady for all the years where I didn’t save explicitly. In favour of my younger and more profligate self, I did pay down the mortgage 😉

    Loughton Monkey retired at 56, and he saved about 25% of his income. This roughly squares with ERE’s calculations when you add in the State pension later on  and he also seems to be saving more than he had originally anticipated. The trick to early retirement is living below your means. There isn’t any other way that doesn’t depend on scarce luck or criminality.

    Unfortunately for me, there are significant differences in my lifestyle which make me wonder whether either I am wrong or I may end up short of money or having to work a little bit longer. These differences are:

    Firstly, all these people are assuming that industrial society carries on in much the same way, so the past is a reasonable guide to the future. My view is darker, and therefore some of the assumptions about the world they live in are different for me. The MSE posters may be right, but I have to chart my path according to my own lights.

    To be honest, I am amazed at the implicit assumption that everything carries on as normal. The best I can imagine for the UK economy is that somehow Peak Oil and other resource crunches are shown to be a chimera, the result of more industrialising economies drawing on resources that have a limited rate of production instead of a Limits to Growth type of brick wall. Even then I still see many years of grinding decline deleveraging the stupendous UK debt overhang in government, in households and in companies. Alternatively we can deal with the results of defaulting – currency crisis, skyrocketing inflation and horrendous unemployment. In my view the PIIGS have already bought their tickets for this one-way ride out of the Euro, and Britain is only separated from that scenario by having a currency it can devalue.

    Yes, Monevator may have been right when he said Britain is booming again when viewed though the selective prism of the stock market. But it isn’t going to feel like that for the average punter on the street. It will take decades, if it ever happens, to pull out the survivors from the twisted wreckage of the British and Western economies, and all the time wealth will probably concentrate towards capital rather than labour.

    That means more jobs haemorrhaging away, more unemployment and a domestic economy stuck in low gear for years. The shattered education system of Britain which was the result of our failure to man up to the hard task of telling some children that they are less bright than others won’t help our economy in that case, and will take many years to repair with money we may not have. Hopefully most of the problem is in the perverse value systems that seem to have have confused equality of outcome for equality of opportunity.

    Another difference in my circumstances compared with the MSE folk is that I may start one project that may add more expense to my outgoings for a while, which again is different from the normal pattern of living.

    So I am a little bit off target. My outgoings are significantly lower than most of the posters, and my savings are probably higher than many. My “number” is about 18k, which given that I have a darker view of the future, possibly slightly greater outgoings than the typical retired couple shows that either I am wrong, or that I have no accurate way of evaluating my attempts to get myself less exposed to the money economy by saving energy and producing food.

    Loughton Monkey is probably the closest approximation to the trajectory I would like to take. He is older than me, and worked for 34 years. Although I have 31 years of NI contributions I don’t think I have worked for 31 years; I believe that when I went to university NI stamps were accrued though I wasn’t earning any significant amounts of money. If I retire in 2012 I will probably only have clocked up 30 years of working, so I am 10% short of his earning years.

    Something else that I learned in reading that thread is that I am lucky so far in terms of physical health for my age, I have no significant issues there, apart from the minor slights and injuries one accumulates through life. I have visited the doctor considerably less than once a year and aim to keep it that way. Part of retiring early is to to try and preserve that.

    I am entering a time of life when I lose some resilience physically, and looking at colleagues at work the stress of the workplace can cause some serious ill-health. I have been lucky there too, the way this has manifested for me is that it is easier to pull muscles for things that really shouldn’t be over-exertions and that the resultant aches take a long time to clear. It is observable that this is much more likely to happen when the working environment is being particularly bad, though since I am in an office job the exertion is always outside work. But it is a warning, and I only have to look around me to see that others have been less fortunate indeed. One guy, who was lived a healthy lifestyle and was into walking and hiking on his holidays with his wife was saving into AVCs like mad and hated the work environment. He looked a lot fitter than me, but he didn’t even get to see his 55th birthday…

    So it’s important to remember that quality of life isn’t all about lifestyle and it isn’t all about the number. I would rather run out of money than run out of health.

     
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