You may have had it drilled into you from an early age that you should save. Being a diligent sort of person, you may have always done that; maximising your yearly ISA allowance, putting 6% of your salary into your pension, investing wisely, even purchasing a buy-to-let property as an additional investment.
But once you’re into the habit, is there a danger of saving too much? More importantly, when can you afford to stop?
Of course, it’s different for everyone. Perhaps a more relevant question is what kind of lifestyle are you planning for when you have financial independence and how much will you need to meet those requirements?
Our culture today is focused on acquiring things: the latest iPhone, that designer jacket you’ve seen, a top of the range sports car. There comes a point, however, when we reach a kind of saturation point without even realising it. That’s why it’s good to take a step back and consider how much money you really need.
Once your basic needs are met,consider how much extra money is truly necessary to cover your routine bills and your retirement income. If you keep classing ‘nice to haves’, such as the annual skiing holiday or the latest iPhone as ‘must haves’, then the larger the portfolio you will need to support those purchases.
And much as we may be surrounded by an acquisition culture, we all know deep down that ‘money doesn’t make us happy’. In fact, many people realise it takes a lot less than they think to be comfortable. After all, many of the best things in life are free: a walk in the park, a beautiful sunset, icing cupcakes with the grandkids.
Your definition of ‘enough’ also becomes critical as it determines the level of risk you will need to take to achieve your goals. You may need to change the exposure to risk in relation to the level of return that you’re happy with as you get closer to retirement, as your focus will be shifting to maintaining and protecting your nest egg.
As you approach retirement, your objectives may be along the following lines:
- to go part-time or work for your company as a non-exec, just a couple of days a month
- to have an annual winter and summer holiday abroad with a number of short breaks in the UK
- to help your children and grandchildren with their educations or to get on the property ladder
- to simply be more in control of what you choose to do
With prudent financial planning, you may find you can start retirement much earlier than you thought and that you can spend more once you’ve retired too. The secret is knowing when you can stop saving and start spending.