Retirement is something that few people under the age of 50 think about on a regular basis. That's because it's a long way off even for a 50-year-old and also because it's difficult for anyone to imagine themselves as an older person. That's particularly the case for younger people who understandably would rather live in the moment as opposed to considering how they'll pay their bills 40-plus years down the line.
However, retirement is a stage in life that will (hopefully) eventually come for all of us. While no person's circumstances are the same as anyone else's, it's possible to estimate a rough figure for how much a typical individual will need to retire.
Clearly, nobody knows how long they'll live for, but assuming a person achieves the current life expectancy of an individual in the UK of 82, then it's possible to judge how long their retirement savings will need to last. Similarly, it's not possible to say with 100% accuracy when an individual will retire, particularly since the retirement age is gradually creeping up. However, an age of 67 seems to be sensible because from 2028 the UK retirement age will be 67-years-old.
So, assuming a retirement age of 67 and a life expectancy of 82, it can be estimated that a typical individual in the UK will enjoy 15 years of retirement. This may not sound a lot, but with a lack of earnings from a job, cash resources and savings can soon be eaten away.
Some people will wish to leave money to relatives and charities and while those are noble aims, for the purposes of this calculation it will be assumed that the typical individual dies with minimal cash left over.
Let's do the math
In terms of how much an individual will spend each year, clearly this is highly subjective. For most people, a mortgage will probably have already been paid off and this means that the required level of income is perhaps lower than it would be in younger years. Similarly, children are most likely to be grown up and won't require financial aid. However, on the flip side, retirement also brings more time to go on holiday, a desire to perhaps buy items that an individual has always coveted and to also help younger family members with university fees etc.
As a result, an annual income of £27,000 seems to be a sensible figure to work with. That's due to the above, but also because it's the UK average salary at the present time. And assuming a 9% annual return (which is the annualised return of the FTSE 100 from its inception in 1984 to the present day), a sum of £218,000 would be sufficient to allow an individual to live in retirement from age 67 until the age of 82, whereby their portfolio value will fall to zero.
Clearly, this figure doesn't take account of inflation, nor does it consider leaving any assets behind. Furthermore, it's a risky strategy to pursue, since living beyond the age of 82 is becoming increasingly common. However, what it is useful in showing is just how significant the returns from the FTSE 100 can be over a prolonged period, with the amount of capital required to live a comfortable lifestyle in retirement perhaps being less than many investors currently realise.