Chris Exley DipFA Creator of MoneyGeek | Financial Coach | Financial Planner

MoneyGeek Digest - Issue 8:
The #1 Most Important Metric

Dear Reader,

I'm writing this edition of the digest from a small village outside of Rio de Janeiro - Brazil - taking a few weeks to wind down.

After settling the bill for one of the finest meals I've ever had (£30 for starter, mains, dessert and drinks for two), my wife and I got talking about whether we'd ever move to a country where the cost of living is lower.

In an age where many of us can conduct our business remotely, it's a conversation I think many of us are having.

For me - personally - I'll stick to the UK for the time being!

This conversation inspired this edition of the newsletter - because the most important thing at retirement is not:

The size of your pension pot.

The tax you pay.

Your investment strategy.

Important? Yes. The most important? Not even close.

The number that actually determines your retirement is how much you'll spend.

And barely anyone gives this enough thought.

The single most important retirement metric...

When I speak to clients for the first time, one of the hardest questions to answer isn't how much they can invest now, or how much their pensions are worth, or when they want to become financially free.

It's:

• What they'll do once they do retire
• Where they will live
• Whether they'll holiday - and where?

Ultimately, it all comes down to one question: how much will retirement actually cost?

If your plan is to walk the Welsh mountains and live a frugal lifestyle - retirement could be much closer (and more achievable) than you think.
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Conversely, if your plan is to cruise around the world, and enjoy meals out once or twice a week, you'll have to make more sacrifices today to get there.

This is completely individual and you need to decide whether the opportunity cost is worth it - more later means less today.

Let's put some numbers on it:

Taking into account a state pension of £12,000/yr, a retirement age of 60, and a growth rate of 6%/yr, adjusted by 2.5% for inflation, here's how long a £400,000 pension could last:

• Spending £2,000/mo - still have £375k by age 90
• Spending £2,500/mo - run out by age 82
• Spending £3,000/mo - run out by age 74
• Spending £3,500/mo - run out by age 71

This is why one of the first things I ask clients:

You'd be amazed how few people can answer this fully.

And this is the same question you should be asking yourself.

Then we dig deeper.

If there will be holidays - where? how many? for how long?

Where will you live? Will there be a mortgage? Will you downsize?

Once we've done that, we can start to reverse engineer how much that lifestyle will actually cost.

And once you can start to picture that ideal retirement, saving and investing becomes so much easier!

This is why spending expectations matter more than almost anything else — get that right, and early retirement becomes far more achievable than most people think.

Until next time (and hoping I can find some bug repellant spray out here!)