Episode 149: Will I be able to afford to retire? How to plan for a financially secure retirement (even if it’s years away) – with Pete Matthew of Meaningful Money

Episode 149: Will I be able to afford to retire? How to plan for a financially secure retirement (even if it’s years away) - with Pete Matthew of Meaningful Money

Jeremy Cline 0:00
Retirement can seem a long way off when you're in the middle of your career. But there may well in the future come a point where you want to start reducing the hours of your work, or maybe even stop working at all and retire completely. And even if that is a long way off, what are some of the things that you can be doing now to set yourself up, so that when you get there you enjoy a financially secure retirement? Come to think of it, what does retirement even look like these days? That's what we're going to talk about in this week's episode. I'm Jeremy Cline, and this is Change Work Life.

Jeremy Cline 0:47
Hello, and welcome to Change Work Life, the show where we're all about beating this Sunday evening blues and enjoying Mondays again. If you want to know how you can enjoy a more satisfying and fulfilling working life, then you're in the right place. It might seem like a long way off, but there will probably come a time where you'll want either to reduce the amount of work you do or stop work altogether and retire. And also, by that stage, you might have fewer outgoings, perhaps you've paid off your mortgage, you'll still have bills to pay. So, how can you plan for your retirement? Are pensions still a thing? And what financially speaking might retirement look like? To help you answer these questions and law, I'm delighted to welcome back to the podcast Pete Matthew. Pete is a chartered financial planner and host of the Meaningful Money podcast and YouTube channel. And if you want to find out more about Pete's background, you can listen to my first interview with him back in episode 27. Pete, welcome back to the podcast.

Pete Matthew 1:44
Thank you so much, Jeremy. Great to be here again. Thank you for having me. You may not know this yet, but how many episodes in total, if that was 27?

Jeremy Cline 1:52
This is scheduled to be episode 149.

Pete Matthew 1:56
Amazing. Well done, man. That's an incredible achievement.

Jeremy Cline 1:59
Thank you so much. Before we dive into the topic, I'd love to know what's changed for you and your business since you were last on. Obviously, there's been a small matter of a global pandemic. What else is new to you?

Pete Matthew 2:10
Yeah, I retired off one of my colleagues. So, I wear two hats, Jackson's Wealth Management in Penzance is my financial planning practice. So, I've retired off one of my colleagues and my best buddy in the world, Roger, a year ago, which was quite a big milestone for the firm. I have one more senior colleague to gently wave off into the sunset, part of the topic for today's conversation, to have him draw his pension and stuff like that. And then, it will be mine in a couple of years' time. But it's been a busy couple of years. And I mean, we've been very fortunate really, because, obviously, I could have been running a restaurant or a hotel or a retail business through the pandemic, and those have suffered hideously. But actually, it seems like, certainly in lockdown, people began to really look at their finances in quite a lot more detail. So, we were absolutely inundated, and continue to be still, with new inquiries and people looking to sort of get a handle on this thing properly. So, we've been extremely busy, and I'm very aware what a privilege that is, such that we've gone from before lockdown 11 to 19 people, and still need more, because we're just taking on clients at a rate of knots, meaningful Money podcast, but the YouTube channel particularly. I mean, I was doing that for about 11 years, and the subscriber numbers were just ticking up very gently. And then, I put out a video called Overpay Your Mortgage or Invest. Sounds pretty innocuous, but it just went nuts. YouTube got behind it, so I've added nearly 50,000 subscribers on top of that in the last year. So, the YouTube channel is going a bit nuts. And that brings its own challenges, because you kind of want to keep up with it. But all very positive, thank you, Jeremy. So, I'm very fortunate, very blessed.

Jeremy Cline 3:56
Brilliant. Wow, that's incredible. And it doesn't surprise me that people have been starting to look at their finances. In my other life as a lawyer, I'm in the estate planning area, and the number of enquiries we've had about wills and powers of attorney and that kind of thing, yeah, the pandemic definitely drew that sort of thing into sharper focus.

Pete Matthew 4:17
Focuses the mind very much so, yeah, that was our experience too. Which is, I suppose, a decent outcome from a pretty grim set of circumstances for many of us.

Jeremy Cline 4:25
Okay, so let's turn to the subject. And the way I'd like to approach this is kind of start at the retirement end and talk a little bit about what people are doing now as they're coming up to retirement, and then work back and figure out what planning people who are still some years away from that can think about implementing to prepare themselves. And I better include the disclaimer that this does not constitute financial advice. I am definitely not a financial adviser. You are a financial advisor.

Pete Matthew 5:01
I am, but I don't give it here.

Jeremy Cline 5:03
Yes, Pete is not your financial adviser. This podcast is for information, education, and hopefully, entertainment purposes only. So, please don't take any of this as constituting financial advice. We might be a little bit UK-focused in some of the concepts that we talk about, but hopefully, the principles that we're going to discuss will apply more broadly wherever you are in the world. And I just thought it might help if we start with a couple of definitions and a couple of concepts, because they'll probably be relevant to what we talk about. So, as I understand it, there are, broadly speaking, two different types of pensions that people might have. One is called a final salary scheme, sometimes called a defined benefit scheme, and the other one is called a money purchase scheme or a defined contribution scheme. Could you talk briefly about what they are and what the differences are between them?

Pete Matthew 6:05
Yeah, so an important distinction. I generally use defined benefits, rather than final salary, only because very often the way those are calculated now isn't just on final salary. So, let me explain. With a defined benefit scheme, as that name suggests, you know what you will get when you retire. The benefit is defined. And it's defined as a function of how long you've been in the scheme, how long you've worked for that company, or employer, the money that you've earned, the level of salary that you've earned, either throughout your career or later on, and then something called the accrual rate, which is basically just a formula. So, if you can imagine, maybe you did 30 years with the company, and there would be like a fraction, so maybe it's something called a 1/60th scheme, it doesn't matter too much about what that means, but if you did 30 years, and you've got 1/60th, for every year that you were there, you would get 30/60ths, that's half of whatever the definition of final salary is. And sometimes it's your salary in the year you retire, sometimes it's the average of the last three, or the last five. In most schemes now, it's a career average, or many schemes now. So, there's lots of ways of working it out. But still, as long as you understand the formula, and you know how long you've been there and what you've earned, you should be able to work out exactly what you will get when you retire. The benefit is defined. The key thing of those schemes is that all the risk is with the employer. You know what you're going to get, you as the pensioner, the member of the scheme, you know what you're going to get, and it's contractual. Okay? So, all the risk is with the employer, they have to provide those benefits to you, under contract. So, the alternative is what we call DC, defined contribution, or as you rightly say, money purchase. And that's what most pension schemes are now. So, you'll see these mostly in the private sector, defined benefit you tend to see more in the public, pretty much only in the public sector these days. But with defined contribution, it's much simpler. And again, the clue is in the name, defined contribution. It's what you put in that is known, what you get out at the end is unknown. So, basically, all you're doing is you're building up a fund of money. So, you have a statement every year, and it's got a figure on it, that's how much is in your pension pot. What you do with it at the end when you choose to retire, there's lots of flexibility there now, but you basically can't cross that bridge until you get to it. All your job is to do while you're working is to pay in as much as you can, get the best investment performance you can, these are the variables really, so that the pot is as big as you can get it when the time comes. Right? So, the name, if you think them through, makes sense. Defined benefit is what you get at the end, the benefit that's defined. With defined contribution, it's only what you put in that you know, what you get out of at the other end is unknown. Does that make sense?

Jeremy Cline 9:04
That makes perfect sense. Thanks for that. And you mentioned that defined benefit tends to be limited just to public sector. I get the impression these probably will disappear before too long, because they're just getting more and more expensive.

Pete Matthew 9:19
They are, and they're getting kind of watered down. So, I mean, if you can imagine if the defined benefit was based on your final salary, the salary you earned in your last year, well, for most of us, that might be the most we ever earn in our life. Right? Whereas most of those schemes, many of them have been watered down, as I said, to sort of career average. And that will be a much lower figure. Our average salary over the 34 years of our career will be a lot lower than perhaps what we earn in the last year or last three years. So, that's an important point. So, they're already kind of being diluted, because they are feasibly expensive for the providers of the schemes, for the employers. It's a massive obligation and liability. And so, over time, these schemes have been closed, or the definitions have been changed, there's been strikes and legal action and all sorts of stuff, because it's such a big deal to a lot of people. Generally, if you work in the public sector, very often you're accepting lower pay rise rates, you have some career certainty, one might argue, compared with the private sector, a lot less normally is guaranteed. But one of the benefits, a key benefit, was this amazing pension scheme. So, if you start to take that away, no wonder people get the hump about it, with good reason. So, it's a big deal, but they are extremely expensive, and that's why we're seeing them die slowly. But it'll be quite a lot of decades, yeah, I think, before they're absolutely consigned to history.

Jeremy Cline 10:44
So, if we look at the defined contribution side of things, so when I started first saving for my pension, the idea was, yes, I would build up this pot, hopefully, it would grow with the amount I put in, investment performance, and so on and so forth. And at the end of it, I would have a pot which I could use to buy an annuity. Which as I understand it, I go off to an insurance company, I say, I've got this pot of money, how much would you pay me every year for the rest of my life in order for me to live, and they would get some clever actuaries to figure things out, and then they'd go, 'Here you go, this is what we will pay you for the rest of your life.' Then 2008 happened. Interest rates hit the floor, they haven't really recovered. Okay, at the time we record this, they have since been going up a bit. Are annuities still a thing? Do they still represent part of pension planning when you're coming up to retirement?

Pete Matthew 11:42
Yeah, they do. And they always have, but more particularly for a certain subset of people. So, as you explained that very well, Jeremy, an annuity is a guaranteed income for life, that you get in return for your accumulated pension fund. You go to an insurance company these days, for the last 30 years, you've been able to go to the open market, choose any provider to give you that annuity, and you shop around for the best rate. There's a bunch of variables. So, whether you choose to have your income go up every year, indexation, whether you choose to provide for your spouse, if you die first, to what extent you provide for them, do they get 100% of your annuity, or do they get half of it, whether you get the annuity paid monthly or annually. Crucially, if you have any medical issues, because if you have medical issues and potentially a curtailed lifespan, then you would get a higher annuity. And so, that's why they've still always been a thing. But I mean, hardly anybody has taken an annuity out for the last 15 years, as you rightly say, just because the math hasn't added up. You build up this big fund, and the income you would get in return was pretty paltry, really. You would have to have lived a long time to get your money back in income terms. And so, they're very much fallen out of favour, because of the quantitative easing and all the financial engineering that happened to basically keep the financial system afloat in 2008. That's led to long-term depressed interest rates and very long-term depressed annuity rates. That is starting to change as we record this in the autumn of '22. So, I think they will enjoy a little bit of a resurgence, simply because the math might add up for more people now, rates start to rise. But the important thing to, I think, remember is that, when you come to make your decisions of retirement, I'm sure we'll get into this, it doesn't have to be a sort of binary decision. It doesn't have to be that you hand over your entire pension fund for an annuity. You can use just part of it to buy an annuity, which perhaps gives you enough to pay your minimum bills. And then, you can keep your pension fund and draw off it in something more flexible to pay for your holidays and the change of the car every five years or whatever. So, it doesn't have to be an all or nothing solution. For us here as financial planners, we have on occasions used an annuity to secure a certain amount of somebody's retirement income. Maybe we do the maths, and we add up the two state pensions, and actually, we think, if they only had another 5000 quid a year coming in, that would basically take all the pressure off, because they would know that their bills will be paid for life. And so, we might buy an annuity just to secure that 5000 quid and leave the rest of the pension fund, more flexibly accessed. So, there's nuance in financial planning, particularly retirement, which is why I have a job, I suppose.

Jeremy Cline 14:37
There's one thing actually which you just mentioned there, which is state pensions, and certainly in the UK, the state pension is still a thing. The age gets pushed higher, it seems to have survived otherwise reasonably intact in terms of keeping up with inflation and that kind of thing. The risk of asking you to gaze into your crystal ball, do you think that state pensions are going to be here to stay and something that we will still be able to have access to in 10 years', 20 years' time?

Pete Matthew 15:11
I absolutely do. I think it's quite trendy, particularly in the financial independence movement, to sort of slag off the state pension really as being worthless. Well, I mean, right now, it's the best part of £19,000 a year for a couple, to have the full state pension. It's certainly not to be sniffed at. Most people understand that it's unfunded, that you don't build up a state pension fund for yourself, it's those that are working now are paying for the state pensions of those that are retired now. And as demographics have changed, we've got more older people, that's becoming tighter, is becoming a much bigger deal in terms of the country's finances. Those demographics are starting to change a little bit, so I read. And so, first of all, I can't imagine that government is going to stand up and say, 'Hey, we're going to scrap the state pension, please still vote for us.' So, obviously, it would have to be done very gently over time. And in fact, as you rightly said, Jeremy, what they're doing instead is they're pushing the age back. For me, it's 67, for most people, under the age of 40-ish, something like that, it'll be 68. But that makes sense, right? We're living longer. So, I think, as long as that demographic change continues to happen, then probably, that's what will continue to happen. I can quite see that, in 50 years' time, state pension age will be 70. Because the state pension came about when we retired at 65 and died by 68. Because we spent most of our working days in physical manual labour. So, I think it needs to evolve, but I don't see it disappearing anytime soon. They'll just have to find more and more ways to fund it, I guess.

Jeremy Cline 16:51
I'm sure that everyone's circumstances are different, but are there any trends that you see, as people are coming up to retirement? Do people just stop one day, that's it, they've done their 40 years, and then, that's it, they retire? Or is it more of a gradual thing, that people will maybe reduce their hours, work part time? I mean, can people even afford to just completely stop working at age say 67?

Pete Matthew 17:23
Some can, some can't. And so, again, the reason I have a job is really to sort of help people navigate the financial system optimally for their unique circumstances. That's what a good financial adviser will do. The understanding of the system is the easy bit, as far as, I mean, I've been doing it 25 years, so I would say that, but what continually challenges me is to find out enough about the individual person or couple sat in front of me and say, 'Right, what about your circumstances, what about your lifestyle and the cost of that, how are we going to meet that cost going forward?' So, yeah, some people have saved enough or have inherited enough to be able to retire on a dead stop and live off their own fat, if you like, for a few years, or in some cases, 30 or 40 years, part of what we would do is project the longevity of money based on some pretty conservative estimates about how things might grow and withdrawal rates and things like that. And we can actually say, 'Well, look, based on those estimates, you're going to run out of money when you're 83. That's not ideal, because one of you will probably live till you're 90. So, let's see what levers we can pull to try and extend the longevity of that money.' But as to whether people are doing hard stop retirements, I think less and less so is the answer to that. I think a lot of people, and I'm sure you're the same, and I'm sure lots of folks listening to this are the same, have seen people work like dogs until they get to retirement and then drop dead within six months. And it seems just such a terrible waste. I think also one thing that the pandemic has taught us is that anything really can happen, and we need to live in a way that we understand that life is not a rehearsal, we need to make the best of today, as well as plan and prepare for tomorrow. So, what I'm finding with folks in say their 50s, maybe early 60s, approaching retirement, they're definitely winding down. Very often, they'll go to four days or three days, or they'll finish their maybe stressful, highest-level career, but do something completely different. So, they're still working, and they're still earning, but they don't have the pressure. So, you know, one guy I know was pretty high-level executive and now drives a truck, a delivery van for a furniture company. Completely stress free, don't do any lifting, he has two burly guys for that, he literally just drives the van. Another guy works for the local butcher delivering meat, he was an accountant, I think. So, these things are just ways to ease into a completely different mode of life, which is what retirement is really. We actually tried to avoid using the word retirement, because it's just got too many connoted links to working. Whereas really, it's not just about that, it's about the choice to do what you want. And for some people, for a lot of people, that's continuing to work, to some degree. I can't see for myself that I will ever not do, to some degree at least, what I'm doing now. I can't really imagine how that might change. My wife might convince me otherwise. But I can't imagine myself ever doing nothing, watching daytime TV. And I'm sure most people think that. So, as long as I've got my health, then that's what I want to do. But if I could do it two days a week, then that'd be great. So, that's what most people think like, you might experience, when they come into the office here and talk to us about their plans, most of them are thinking, 'Yeah, I want to do something, even if it's volunteering at a food bank, or doing some kind of maybe non-executive director work, if they've been an executive in their career. Fortunately, there's more options than ever before, but I really do think people need to think about this stuff before they get to it. And that's a large part of what we do here, is to help them think through these options.

Jeremy Cline 21:22
I completely agree, and it's having a purpose, it's still having a reason why you're getting out of bed in the morning and doing stuff, and yeah, I agree with you, just the idea of getting up and watching daytime TV all day every day just sounds like a perjury. Even if your purpose is, I don't know, looking after grandkids or running social groups or something like that, I quite agree that it's so important that you continue to have that thing, what are you still around for.

Pete Matthew 21:56
Exactly. I have to say, I don't know that I've ever met a bored retired person. They always find stuff to do. Whether it's bowling or, as you say, grandchild minding or whatever, usually, when I speak to my retired clients, you had good week, they're like, 'Oh, busy.' Great. That's brilliant. It gives life meaning.

Jeremy Cline 22:16
My dad's retired, and he's always complaining about how he's too busy. And I kind of think, I wish I was as busy as you are! So, you touched on this a little bit earlier, when you're starting to think about retirement, maybe you're five years out, and you've got this pension pot, which you've built up over time, you've got other savings and investments, hopefully, who knows, you might have a rental property or two, what are some of the ways that you start to think about, okay, I'm going to wind down, maybe work less, maybe not work at all, what am I going to use to pay the bills?

Pete Matthew 23:00
All comes down to that really, Jeremy. I often say to clients and to my advisors here that everything we do, all financial planning comes down to income and outgoings. No matter how big the numbers are, right? The reason why lottery winners and premiership footballers go bankrupt, despite the vast wealth, it's because they spend too much. Right? So, you can always spend more than it's coming in, no matter how much is coming in. And so, we have to start there. And so, we call it cash flow planning, because it all comes down to that. If you are building wealth, if you have more going out than it's coming in, you're going into debt, you're getting poorer. You have to spend less than you earn. Now, when you get to retirement, you're almost certainly going to spend more than you earn, probably, more than you earn, so more than is the guaranteed income going to come in from state pension or rentals or if you've got a defined benefit, sorry, pension, then most of us will spend more than it's coming in in terms of guaranteed income. And so, that means we will have to dip into capital. And then, we'll get to that in a minute, no doubt. But it has to start with cash flow ins and outs. And so, I will be saying to people, okay, if you were to retire now, first of January, most people want to kind of mark that event. So, very often it's a big holiday, or they've had a purchase that they've had in mind. Camper vans get mentioned often in my office. I've had a few clients recently where it's been their goal to own a Tesla, and so that's what they do to mark their retirement. They buy a car that they've always wanted or whatever, a holiday home. So, very often, there's sort of reasonable, it might just be like I'm going to take all the kids and grandkids on holiday for one big family blowout and celebrate my retirement. Which is great, my dad did that. So, you factor that sort of stuff in. But ultimately, life settles into a sense of normality, some kind of routine, it might be a different routine to what we've known, and with that comes somewhat predictability of costs. And so, I tend to say to people, to the nearest 500 pounds a month, what's it going to be like to, firstly, just live, eat, heat and light the house, have the necessary insurances, but just sort of minimum monthly expensive, what's that figure? And then, what would we ideally like on top of that? A sort of required, and then a desired level of expenditure. Okay, so that's our starting point, what's going out. And while you can't see decades into the future, assuming that nothing significant changes, you can probably say, okay, that's probably going to go up a little bit by inflation, or a lot, whatever, over the next few years. Let's try and put some numbers on that. First five years of retirement, what's that going to look like? What's going to go out in each of those years? And then, on the other side of the line, you say, okay, right, what's coming in in each of those years? Well, I know my state pension is going to come in then, and I know it's going to be this much, because I've logged in and checked. My defined benefit pension is going to kick in in that year, I know it's going to be that much, and I know it's going to pay me a lump sum of X. So, you can start to build a picture, and you'll probably have some years where you've got excess coming in, because your pension lump sum is paying in that year or whatever, and you'll have some years where you'll be in deficit, there'll be more going out than you have coming in. And eventually, once most of us get to state pension age, that's when we know all our incomes that are going to come in are in. Right? Everything's in payment by then, usually. And so, then we can work out. Usually, there's a kind of a period that I call the danger zone, so before everything starts paying in. So, maybe if you want to retire at 60, you might have seven years before your state pension starts, you might have a defined benefit pension start at 65, maybe your partner's a couple years older, they might have some income coming in at some point, but in that first period, that's usually when we draw most heavily on our assets. And then, once all the income sources have started to kick in, then things very much settle down. So, for us, when we're planning for our clients, we need to sort of help them say what is going out, what do you want to go out, what kind of life do you want to live, let's see if we can afford it. Too many people don't spend enough, I have to say, early on in retirement, and they end up dying far too rich. But we need to start with income and outgoings, it all comes down to that. So, we need to establish outgoings, establish income, and where there is shortfall, then we start to get into where should we take that shortfall from, pension, ISA, cash, premium bonds, where? And that's a large part of what we do.

Jeremy Cline 27:36
Where do you stand on the kind of spending your last penny the day before you drop dead kind of thing? Obviously, that's impossible to plan for, and some people are going to have ideas about whether they want to leave money to subsequent generations, but if you've got money coming in, but you've also got, hopefully, a healthy pension pot, an amount of capital, what are your thoughts around drawing on the capital itself, rather than using it to create income through investments?

Pete Matthew 28:12
I spend my life telling people to spend their own money. Because otherwise, what's the point of having saved it? And again, you're dead, right? Some people want to leave as much as they can to the family and will almost do themselves out of comforts and things that they might want so as to leave more to the family. That's something we actively discourage. We always try and get our clients to put themselves first. Some don't want to leave the family anything, and they want to blow the lot before they die. Of course, none of us know the day that we're going to die. And so, you're dead, right? The biggest issue that I come across is people saying, 'I better not spend too much too early, because I might need long-term care when I'm really old.' Right? If I hear that once a week, it's at least that. But the problem is that long-term care is a spectre that most of us will actually never meet. The majority of us won't need full-time residential care. Most of us will get ill and die at home or die in hospital. So, I know it's not cheery thought. Those that do go into long-term care generally are not in for that long. Right? Again, there's always people who break the averages, the extremities of the normal distribution curve, but most people are in care for maybe a couple of years, something like that. I did know the stats exactly, but that escaped my mind now. And so, spending hundreds of thousands or seeing your entire estate wiped out by long-term care is very much the exception rather than the rule. But too many people leave too much money on the table, because they think it's going to be this huge deal. So, that's a really hard balance to strike, and it's quite a difficult conversation to get over to people. But all the time, we had a couple in here only yesterday, they're drawing a regular set amount from their investment, and markets are pretty challenging at the moment, it's gone down. But I was able simply to say to them, look, even if your pot never grows again, never earns a penny ever again, there's 26 years worth of your current level of withdrawal left here, and you're 80 years old. So, it's going to take you to 106. It will probably be okay. Right? But people don't get their heads around that maths. So, I just think money is never for its own sake. There are only three uses of money, and that's for spending now, spending later, i.e. investing so that it's worth more later, and given away. But hoarding is a terrible use of money. So, I just think people need to spend more earlier, as long as in so doing, they don't hamstring their future. It's a fine line to walk, but with good planning and just a bit of fairly simple maths and Excel spreadsheet, you can probably work that out.

Jeremy Cline 30:59
So, all we've discussed so far has been a really useful background to what retirement can look like. But I am conscious that most of the people who are listening to this episode, retirement is probably at least 20, maybe 30, maybe more years ahead. So, let's go to the other end. And first of all, and this is probably an impossible question, but if you've got someone like me, who's in their mid-40s, how do I figure out what I might need when I come to retire?

Pete Matthew 31:36
There is no easy way to do this, because it's always going to be based on assumptions, and those assumptions will be wrong. That's the line I tread with clients. I always say, look, we're doing financial planning, and we put very clever charts on the screen or whatever, but I'll always say to them, look, at best, this is educated guessing. Right? And because of that, that's why we tend to fall back on rules of thumb. And the most famous rule of thumb, of course, is the 4% rule, which simply says that, again, starting with what your necessary outgoings are, so let's just say it's 20 grand a year, well, you would need 25 times that to have a pot big enough from which you could draw £20,000 a year and increase that £20,000 the year by a bit of inflation every year, and not run out of money. It's only a rule of thumb, lots of people talk about the 3% rule or the 3.2% rule, or whatever. But of course, that's a capital pot to draw from. The Financial Independence, Retire Early, the FIRE movement, they go big on that, because very often these people want to retire at 35, right? So, that's a long way from state pension age. So, for most ordinary people though, those that are probably going to retire at something approaching normal time, from 60 onwards, say, we first need to establish what our income is going to be. So, you can kind of project that, what might that be, your pension statement will give you some idea. It'll be wrong, but it'll be a reasonable idea. You'll know roughly, well, I'm going to have the full state pension, so I can factor that in. The crucial thing to do is always to work in today's money, right? Because we have no idea, if you're 45 now, you have no idea what things are going to cost when you're 65, in 20 years' time. So, you can only think in today's money. You might say, okay, well, if I had the full state pension now, it's £9,800 a year, if I was retiring now, my company pension tells me I would have £10,000 quid a year coming in defined benefit. That's great. So, I've got, let's call it just under £19,000, or just under £20,000 of income coming in. But actually, I'm spending £35,000. So, where is the rest going to come from? Then, you start factoring in income tax and your head explodes, right? So, I honestly wouldn't spend too much time obsessing about a number. I think, potentially, that's a rabbit hole you might not want to go down. I would start with when you would ideally like to retire. Start with a point in time which kind of makes sense to you in the abstract. It might be nice to sort of go down to three days a week when I'm 55. Okay. So, just save as much as you can until you're 52, and then start really trying to put some numbers on it. Because I just think you end up down a real rabbit hole of complex calculations and stuff, and I'm not sure it's massively valuable. You can pay a financial planner, like me, to do it, but most people who come to us, it's just like save as much as you can, and then save a bit more when you think you're saving all that you can. Just try and keep pushing it. Because ultimately, that's how you build up fat that you can draw from down the line. I like to keep things simple. I know not everybody's like that. Some people love the numbers and really like to dig into it. I just don't, which is quite ironic, given what I do for a living, but I just tend to say to people, save as much as you can, but commit to regular increases. So, if you think, okay, I'm saving 250 quid a month into my ISA or whatever, just put a calendar note in six months' time and make it 300 quid a month. And do the same six months after that and keep going.

Jeremy Cline 35:18
And when you say, save as much as you can, what are the vehicles that people might use? So, we've talked briefly about pensions, you've mentioned ISAs, which are essentially, as I understand it, tax free savings or investment accounts. I mentioned briefly that there's property, rental properties. So, yeah, when you've got someone who is in their 30s, 40s, and they're looking at where to put their money, how do you start to think with them about where to allocate it?

Pete Matthew 35:50
Yeah, good question. The most bang for your buck will always be your pension. Particularly if you're employed, and you've got an employer who will pay into a pension for you and match what you put in. I mean, nowhere on the planet will you get basically 100% return overnight on your money, because your employer is paying in for you as well. Also, there's tax relief, so either your pension payment goes in, is kind of taken off your salary before you pay income tax, so notionally, instead of paying income tax, that's going into your pot, that's what tax relief is, essentially. So, again, just the most tax efficient way to save is in a pension. There are some taxes on the other end, but still, the numbers stack up significantly in favour of pensions. So, that's always priority number one, right? But there might be a point where you're, you don't want to pay so much into a pot that you can't access until at least 55. And that age is rising to 58 in 2008. Sorry, in 2028. So, if you're 30, you might not want to put every bean you've got into a pot that you can't access for another 28 years. So, that's why ISAs have benefit as well. They're not quite so tax efficient with money going in, you don't get any free money, your employer won't pay into your ISA for you, but still, they grow tax free, and they're accessible tax free. So, there's advantages in that as well. For most of us, that's all we'll ever need. I mean, you can put £20,000 quid a year into an ISA, you can put 100% of your salary or £40,000 a year, whichever is lower, into a pension. Most of us are not going to get anywhere near saving 60,000 quid a year, that's five grand a month. So, for most of us, those two pots are fine. Buy-to-let investment property is a different vehicle again. It's great because you can leverage it, so you're borrowing somebody else's money to build wealth. You can't do that with many other assets. So, that's what makes investment property unique. But you know, if you're a landlord, there's all kinds of legal requirements and responsibilities on you, and buy-to-let property is not very tax efficient. In fact, it's very tax inefficient, the stamp duty and there's capital gains tax when you sell it and all this sort of stuff. So, it's another string to the bow. Absolutely, it's a great asset class, but for most of us, pensions and ISAs will do it and will provide all you need to draw from in your later years. So, you can get fancier into the worlds of venture capital trusts and enterprise investment schemes, but those are not for the faint hearted. They're very tax efficient, but they're very risky. So, most people don't bet the farm on that kind of stuff.

Jeremy Cline 38:31
I was always told that you start saving earlier. The earlier the better. But I also know people who are similar age to me who go, 'Yeah, I haven't actually started my pension yet.' And there's a bit of a feeling of is it even worth it. So, if you're someone who is coming to this a little bit late in the game, how can they start making sure that they've got meaningful provisions for later on?

Pete Matthew 39:00
Yeah, it's always worth it. I mean, if you were to say to anybody, look, I will double whatever money you put on this table and give it back to you. Most people would say right, they would find as much as they can to put on the table so that it gets doubled and given back to them. That's essentially what a pension is. And so, even if you're starting late, even if you're 50 and haven't really taken it serious up till now, anything you can get into your pension is going to be better than nothing. I mean, one is always greater than zero. So, to say, well, is it really worth it, or I might as well not bother now, is actually, I think, a very childish way of approaching the future. We need to grow up a little bit and say, look, okay, yeah, I've left it late, that's done now, we're not going to beat ourselves up, certainly no judgement for me. We've all done things and lived our life the way we've chosen to do it. But now, if we actually want to see some kind of end game where we're not working until we're physically unable to anymore or mentally unable to anymore, then we need to make some provision. And a pension is easily the most bang for the buck, right? So, that's what you need to do, you just need to aggressively pay into your pension, ask your employer about salary sacrifice, which is just a mechanism for paying into a pension. Some employers will pay a little bit more if you do that. Ask your employer how much they will match, employers have to put a minimum of 3% in these days, but you might say to them, 'If I put 10% in, will you match up to 10%?' And maybe it's an incentive to keep you on the books, they will do that. Maybe they won't. But it doesn't make any sense to put any less, excuse me, than the maximum match you can get, particularly if you're starting late. So, if you can put 10% in, and they put in 10%, it's 20% of your salary going in. Right? And you get some tax savings as well. So, that's really the answer. If you're starting late, I'm afraid it's going to be harder work. Okay? You're dead right. If you start in your 20s, the magic of compounding has had decades to work for you. If you're starting in your 50s, you're going to have to work a lot harder, I mean, a lot, lot harder, right? And you're going to have to make some pretty difficult decisions about spending now, versus being able to live reasonably well when you stop work. So, it makes it more painful if you start late, but it's certainly still worth it. I wish there was a magic bullet, a sort of magical late starter plan, that you could get a sort of 60% tax relief on or whatever, but there isn't. So, it's just going to cost you more and be a bit more painful if you start late. But that's like, if you get massively out of shape, and then realise you've got medical issues, it hurts a lot more when you get on the treadmill than it would be if you were doing it when you were nice and thin. But once you get going and you build the momentum, you keep going, you keep going, you'd be amazed actually how quick wealth can build if you're consistent, even if you start late.

Jeremy Cline 42:03
I suspect, given what you've previously said, that I might know the answer to this question, but are there things which most people don't think about when it comes to saving for retirement? So, you've said that, basically, pension and ISAs are essentially the only things that people need. And are there any kind of things which you look at that people don't do, and maybe they never even get the advice to do it, but which, for you, it's a you're missing a trick here?

Pete Matthew 42:37
No. Fortunately, we live in a world, yeah, we live in a world where the democratisation of information means that there's nothing really hidden, there's no black art to what I do for my clients. Actually, my job is mostly a coaching and encouragement job. The financial side is well known. And yes, people come to me, they have all the benefits of regulatory cover. Right? I'm a regulated adviser, and so there is protection for my clients, which is exactly as it should be. But there's not a sort of magic bag of tricks that professional advisors have, which make all this stuff easier. Sometimes I wish there was, because I'd probably be a billionaire myself. But there isn't, unfortunately. It's the same stuff, it's a bit of a grind, we'd all love to sort of find the next Tesla, which the share price just goes 100 times or whatever, but those are the exceptions rather than the rule. You're probably more likely to win the lottery.

Jeremy Cline 43:36
Pete, this has been a really, really useful introduction to this subject. If someone wants to read more into either the financial aspects of retirement or even just you mentioned the sort of mental shift in retirement, are there any books which you'd say here's a good primer for you?

Pete Matthew 43:55
Yeah. I mean, if you're into this, into the financial side, particularly if you have a pension pot that you're thinking to draw down from, there's a book called Beyond the 4% Rule by Abraham Okusanya, which is a brilliant primer. It's a little bit technical, but actually, he has a way of writing which makes it accessible. So, that's a reasonable thing. Actually, my next book is going to be on this subject. So, browse in a couple of years when it's written and published. You'll have me back on, Jeremy, and I'll talk about it. But as far as the psychological element, which I think is a much bigger deal, actually, we spent 40 years being defined by what we do, you go on a TV game show, they'll say, 'Okay, this is Pete, he's a financial planner, or financial advisor.' If you're in your 60s, they'll say, 'This is Barbara. She's a retired head teacher.' So, okay, she's still being defined by what she's retired from. Our jobs are so important. They define us to a very large degree. And when they stop, it's a much bigger psychological deal than a lot of people expect. I mean, I've had people weeping in my office, because they feel they just don't have an identity. Whereas they used to be the CEO or a senior partner of a legal practice or whatever. So, there's a brilliant, brilliant book called Changing Gear by Jan Hall and Jon Stokes. Changing Gear, it addresses this with some brilliant examples of how people have made the transition into retirement from high-flying careers. Lots of great stories and really good principles. So, I keep a stack of them in my office now, and give them to people for whom it's relevant, because it's a huge issue. So, I will be thinking almost about what retirement looks like from a day to day, what am I going to do with my time, how am I going to feel about it point of view, because the money will probably be alright.

Jeremy Cline 45:44
As always, I will put links to those in the show notes. And if someone wants to get a hold of you, where's the best place that you'd like them to go?

Pete Matthew 45:51
So, the home base really is meaningfulmoney.tv. You can jump across to the YouTube channel or download the podcast on there, but just search Meaningful Money, you'll find me.

Jeremy Cline 45:59
Brilliant. Links to those will be in the notes as well. Pete, thanks so much. This has been a fantastic introduction to the subject. Thanks so much for coming on the podcast again.

Pete Matthew 46:08
As always, thanks so much for having me, Jeremy. Thank you.

Jeremy Cline 46:11
Okay, hope you enjoyed that interview with the inestimable Pete Matthew of Meaningful Money. What I like about Pete's approach is that he always keeps things simple. Years of experience have taught him that slow and steady wins the race. You save each month, you invest for the long term, and you let time do its job, and hopefully, end up with a pot which will fund your retirement. It's not whizzy, it's not sexy. In many ways, it's actually pretty boring. But it works. I also really liked what Peter had to say about the thinking when you get there. Two points really stuck out. One is that hoarding wealth is a terrible idea, and you're much better getting out there spending it. Obviously, you need to be mindful of the fact that you don't know how long you will need it for, but just holding it up and scrimping and saving and not using it to enjoying yourself, that's actually a pretty poor use of the wealth that you've built up. And the second is what Pete was saying about long-term care. Because I've got a few elderly relatives who I know are pretty paranoid about that, and they do restrict their saving, because they're worried that, ultimately, they are going to have to pay for long-term care. But as Pete said, that's not likely to be an issue for the majority of us. So, plenty of useful tips, and well, if you haven't started saving for retirement yet, now's the time to start. As always, this week's episode comes with a full set of show notes and a transcript, and you'll find them at changeworklife.com/149, that's changeworklife.com/149. And if you'd like a good companion episode for this one, then go back and listen to episode 82 with Joseph Kuo. It's a really interesting discussion about just what is the point of money, what is its value to you, what is it that you plan to use it for. It picks up on some similar themes that Pete mentioned in this week's episode, so well worth a listen, if that's something that you'd find helpful. In two weeks' time, it's episode 150. And many of you know that I've got a special Ask Me Anything episode planned. I've had some great questions, and I can't wait to answer them. So, make sure you're all subscribed. On Apple podcasts, there's a little plus button. On whatever app you've got, there's going to be an obvious button that you can use to subscribe to the show. So, make sure you're subscribed, and I can't wait to see you in two weeks' time for episode 150. Cheers. Bye.