The dystopian future imagined in The Matrix has all of us, unwittingly, living under the control of sentient machines. Human beings go about their day to day lives, believing that they live in the “real world” while totally unaware that the reality that they inhabit is nothing more than an illusion. A hyper-realistic simulation.
In actuality, the robots have overthrown humanity to harvest our bodies as an energy source. They use the simulation as a means of keeping us all distracted, to ensure continued acquiescence.
Cheery stuff.
There is a pivotal scene in the first film (we don’t talk about the other ones) where the character Cypher cuts a deal with the machines.
He is not oblivious to his reality, Cypher chose to take the red pill and understands full well that in the world that he inhabits, he exists only as a slave.
And yet, he still chooses illusion.
“You know, I know this steak doesn’t exist. I know that when I put it in my mouth, The Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realise? Ignorance is bliss.”
Managing our finances demands a constant balancing act between the needs and wants of our current selves, and the needs and wants of our future selves.
Money is, at the end of the day, simply a resource which we use to live the lives that we want to live. Like any resource there will be times where we have access to an abundance of it, and times where it is relatively scarce.
We save because we want to hedge against scarcity risk. By saving, I am putting off things that I want to do today so that I can ensure that I have enough in the future.
These are easy concepts to understand, but as we all know, more difficult to put into practice.
When we are young, the future is an illusion. We can’t imagine what sort of people we are going to be in six months, never mind at retirement. So our future selves’ needs can get somewhat left by the wayside.
I don’t want this post to seem like I am having a dig at young people. I’m not. I absolutely believe that life is for living now. Frugality for its own sake represents a fast track to misery.
But, and this is a big but, the numbers tell us that as a society we might have a fairly large retirement shortfall problem coming down the road.
The Pensions And Lifetime Savings Association (PLSA) recently published what they understand to be the current cost of a basic, moderate and comfortable retirement. They believe that, at the moment, a “moderate” retirement costs a single person £31,300 a year.
And that is the cost today. What we know for absolute sure is that this number is only going to go in one direction, due to our good friend inflation. Over the past thirty years the price of goods and services in the UK has risen by 2.68x.
Data Source: Office for National Statistics. Inflation rate uses the Retail Price Index.
In order to examine what the theoretical cost of a future retirement might be, let’s take a hypothetical 36 year old and assume that they want to hang up their working boots at the age of 66 - at which point they wish to enjoy a moderate retirement as defined by the PLSA.
If we assume that inflation between now and then runs at 3% (just above the Bank of England’s 2% target, but below the average rate of inflation over the past thirty years), then that same standard of living in retirement won’t cost £31,300 p.a. in thirty years’ time. It will cost £75,973.
Do we now see just how destructive the perpetual onslaught of inflation can be?
The capital sum required to provide for an annual expenditure of £75,973 at that point will likely be somewhere in the region of £1,688,289. In other words, in order to be confident that you can afford a moderate retirement in thirty years, you will need by that stage to hold liquid assets (outside of the value of your home) totalling £1,688,289 in value.
I say excluding the value of your home because although we can always release equity from our homes by borrowing money against the value of the property or by downsizing, it is typical in my experience that this often represents a last resort for people.
You might have also noticed that I have made no reference to the state pension in my calculation of the retiree’s annual income requirement. I will write about the state pension in more detail one day - but for now just know that the state pension currently affords those at the age of 66 and above, who have made sufficient national insurance contributions during their working lives, an annual income of £11,502.40.
The state pension is an incredibly valuable benefit for a number of reasons, but primarily because the amount of income paid is revised each year to rise at least in line with inflation.
As well as being a valuable benefit, it is also an incredibly expensive one. And only likely to get more expensive.
For not only are we all living longer, but people are choosing to have fewer children which means fewer working taxpayers in the future to be able to fund state pension payments.
Source: Office for National Statistics, Financial Times.
All of which is a way of saying, I think that it would be sensible to assume that the state pension will not exist in its current guise in thirty years. Indeed in my own personal financial plan I make no provision for receiving any state pension.
Selling based on fear is lame.
You can’t frighten people into changing their behaviour but it is incumbent on anyone who works in an advisory capacity to only deal in the unvarnished truth, warts and all. The numbers are the numbers and £1,688,289 is a chunk of change.
The median individual in the UK, aged between 55 and 66 and who is yet to retire, has £37,600 in pension savings - a little more than the current cost of one year’s moderate retirement. Almost a third of people in the UK do not expect to have any pension provision beyond the state pension in retirement. This is the landscape that we find ourselves operating in.
It is only by “red pilling” ourselves and waking up to the scale of the task in hand, that we can begin to do something about it. Ignorance cannot be bliss in this case, our future comfort and dignity depend on it.
For those of us who are twenty or thirty years from retirement - there are a couple of steps that we can take to maximise our chances of success:
Spend less than you earn. A little bit of lifestyle creep is fine (and to be welcomed!), but not too much. Your real mates don’t care about your new phone.
Put on your “financial bulletproof vest”. Have at least three to six months’ necessary expenditure saved, and set aside in cash, at all times.
Take care when choosing who to spend the rest of your life with. The PLSA figures show that retirement is, per person, cheaper for couples so picking the right partner can be financially advantageous as well as, you know, making you happy.
Prioritise saving within tax advantaged accounts such as ISAs and pensions; and
Invest these savings in real assets (property and stocks) to generate long term returns in excess of inflation.
For those of you who are a little closer to retirement, if you don’t yet know how much money it’s going to take for you to be able to retire comfortably - I can help you to figure this out (free of charge). Just drop me a line at david@beechgrovefinancialplanning.co.uk.
None of the above is intended to constitute individual advice and past performance is not indicative of future returns.
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