The Retirement Living Standards (RLS) give us a picture of the kind of retirement lifestyle we might have. Based on independent research by Loughborough University, they were adopted by the Pensions and Lifetime Savings Association, a body that represents pension schemes. The standards cover three types of lifestyle: Minimum, Moderate and Comfortable. They provide estimates of the costs required to sustain such lifestyles, for both singles and couples. They’re quite easy to get your head around, which is good news. If you’re not yet familiar with them, do take a look. Now let’s see how they might fit into actual retirement planning.
What the Retirement Living Standards tell you
The first thing to realise is that RLS isn’t personalised to you. It has examples based on three lifestyle categories. The idea is that you should have some idea of what type of lifestyle you’re aiming for. Hopefully it’s more than just the Minimum category. If you’re particularly wealthy, it might even be more than the Comfortable category. The key thing it tells you for any given lifestyle category is the annual cost of supporting it. By extrapolating to your own expectations, you should get a general idea of how much it would cost to support your target retirement.
When focusing on any one category, RLS doesn’t distinguish between essential and discretionary spending. Each category assumes different levels of spending on things like housing, meals out and holidays. Most of us would agree that spending on housing is (largely) essential, but spending on meals out and holidays is discretionary. For its own purposes, RLS doesn’t need to make this distinction.
Lifestyle: continuity or aspiration
If you haven’t yet retired, two ways of looking at the RLS lifestyle categories spring to mind:
- You could identify the lifestyle that most closely matches the one you’re currently living. You could then plan with the goal of maintaining the same standard of living after retirement.
- Or you might aspire to a particular lifestyle that’s either more or less comfortable than your current one. You could then gear your retirement planning to having enough money to support your target standard of living.
For both of these approaches, the idea is that you determine the annual cost of achieving your target retirement lifestyle, with reference to RLS. You then set about saving enough, so that by retirement you can afford the required level of spending for the rest of your life. Of course, that’s easier said than done. You need to take into account your expected guaranteed sources of income, savings income and growth, life expectancy, taxes, and much else besides.
But you’re planning towards a fixed target. There are a couple of potential problems with this:
- Your target lifestyle might not be achievable based on your current finances. Or else it might require you to work till you drop. You may have set the bar too high.
- You might be being too frugal in your aspirations. Unless you’re prioritising leaving a huge legacy, you may have set the bar too low.
The art of the possible
However, there’s a more pragmatic approach to retirement planning. Instead of planning towards a pre-determined lifestyle, determine the lifestyle that’s both sustainable and that most closely achieves your goals. When we say ‘sustainable’, we don’t just mean sustainable after retirement; rather, sustainable starting now and lasting for the rest of your life.
In order to do this, you need to distinguish between essential and discretionary spending. Essential spending is for what you need; discretionary spending is for what you want. Once you’ve made this distinction, you need to carefully budget your essential spending. As for your discretionary spending, you need to find the level that won’t need to change as you make the transition into retirement. This approach is what economists call Consumption Smoothing. Once you’ve found your optimal discretionary spending, you should then be able to see where your lifestyle fits on the RLS spectrum.
But once again, this is easier said than done. It’s not just a case of determining a sustainable level discretionary spending. For example, you need to ensure that you’re not under- or over-funding your pensions; and that you have a workable strategy for income generation after retirement; and that your standard of living isn’t too frugal. There are numerous variables to consider. You need to find the combination that gives the best chance of the retirement outcome you desire.
Fortunately, help is at hand with our Intelligent Retirement Planning Calculator. We specifically designed it to solve this type of optimisation problem, whilst taking into account market uncertainties and variable life expectancies.