The equation of life

I have long seen the only problem with retirement as being able to afford it. All that time to do what you want must not be constrained by lack of money to get on with it. Sadly, in Britain the state treats all retired people as incipient spongers itching to soak up what little tax revenue the NHS has left for other purposes. You are not allowed to cash in your pension pot except in miserable slices dictated by the prevailing annuity rates and when you reach 75 you are compelled to hand it all over to an insurance company in return for an annuity at a rate that in any half way robust economy will pay out little more than the annual return on the capital, thus leaving said insurance company with a handy lump sum for themselves when you die.

For those of modest means, that is excluding people with golden handshakes in seven figures and most public sector employees, this means that a reasonable standard of living can be maintained only by eating into one’s capital. Capital in this context is very much liquid assets and not one’s house, since you still need somewhere to live. First you have to warn your children that you are unlikely to leave them anything of value other than the house and second you have to work out how long you can survive, financially rather than biologically speaking. To quantify this I have drawn up the Equation of Life.

The equation is a simple one. It is

Y = (C + D)/ P

where C is current capital, cash in the bank, ISAs or funds you are free to liquidate (therefore not your pension pot), D is what could be added to C by ‘downsizing’ your house and P is the amount per year by which you overspend your pension and any other income. Y then gives the number of years you can afford to live at your present rate of extravagance. I call this the FLE or Financial Life Expectancy. Of course if your P is zero or trivial you can afford to live for ever and have no problem, to which I would say either get a life and take up some expensive hobby or think about who or what else could benefit from your surplus. The worst possible thing to do would be to leave it to be taxed at 40% and have the government fritter it away on health and safety police and new road signs.

I have just worked it out. I half expected the answer to be 42 but no such luck – a mere 28. Since this would allow me to carry on until I reach 96 it doesn’t sound too bad. But one must beware of the variables. P can change even if your spending doesn’t – either because of inflation (there should be a separate measure of inflation for the retired, reflecting their different necessities and priorities and used to revise the state pension; council tax would feature more heavily than in the standard calculation) or, if you have a drawdown pension, because of the performance of the stock market and changes in annuity rates. D depends on timing, the state of the housing market and how far you are prepared to reduce the amount and quality of space you live in. Then there is the effect of once off capital expenditure, like replacing your car. In this light the new kitchen SWMBO wants has its cost not in cash but in years off our lives.

Here perhaps we have the makings of a new victim class for those whose medical life expectancy exceeds their FLE. We need government recognition of the problem, followed by action - though sinister thoughts creep in when one contemplates which end of the problem action might be taken on.