The top cashflow forecast in Figure
Three demonstrate that the couple still face a shortfall against their
projected expenditure in retirement.
The forecasts assume that although
their mortgage will be paid off by the time they retire, their expenditure will
increase when they first retire. This
kind of bounce is common, as newly-retired people spend on those projects that
they have been dreaming about, whether that is travelling the world, taking up
new hobbies or simply spending more on socialising and eating out.
For most retirees, their
expenditure settles down to a more stable pattern after about five years; it is
important to build this kind of insight about spending habits into personal
cashflow planning, and not just concentrate on the savings and investments side
of things.
To tackle that shortfall, thankfully
Joe made some headway by starting to contribute to a defined contribution
pension earlier in his working life. The
cashflow modelling tool is very useful for determining how much that income
shortfall is likely to be during his and Jessie’s retirement, and what level of
pensions contributions during his working life will mitigate that shortfall.
The lower cashflow forecast in
Figure Three assumes that Joe contributes £500 a month from 20 years before he
retires (i.e. when he has stopped paying Johnnie’s school fees). The forecast shows that this level of
contribution will mitigate the shortfall and that based on Office for National
Statistics (ONS) life expectancies, Joe and Jessie’s combined pensions should
see the couple through to the end of their lives.
