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Family Finance Figures 2009-10-14

Posted by clype in Articles of Interest, Money, Statistics.
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It’s surprising (and depressing) how much money you’ll need before you can call time on your career.

It’s a fantasy all but the very richest of us have probably entertained: tell the boss where to stick his ‘one-to-ones’ and ‘spreadsheets’, turn on our heel and storm out, never to suffer ‘the daily grind’ again.

But how much would you really need in the kitty to turn this dream into a reality?

We’ve crunched the numbers for an average couple at various stages of their lives so you need wonder no more.

So, who are the Averages?

  • To give you an idea of how we reached our conclusions, here are some of the basic assumptions we made:
  • Mr and Mrs Average have two children, which remain financially dependant until our couple hit 50.
  • The family have one foreign holiday a year and run a small car.
  • According to ‘The Council of Mortgage Lenders‘, the average mortgagee is 36 and owes 112 030 GBP.
  • We’ll assume that they keep faith in the NHS and have very average taste in clothes and food.

The Averages age 40

By age 40, they will owe around £110,000 on their mortgage and when they’re no longer battling the rush hour traffic, will do up to 6,000 miles a year in their saloon.

According to recent data from comparison site confused.com, these are the Average’s outgoings:

  • credit card and loan debt 2 791 GBP/year;
  • utility bills 1 167 GBP/year;
  • insurance costs 1 476.84 GBP/year;
  • mobile and land-line phones 627 GBP/year;
  • council tax 1 222 GBP/year;
  • Food costs 3 724 GBP/year;
  • TV licence 142.50 GBP/year;
  • Satellite or cable package at 225 GBP/year;
  • Internet access will set them back an average of 204 GBP/year.

We’ll also let them go on one foreign holiday a year. According to the Expenditure and Food Survey, ‘Office for National Statistics‘ this is 650 GBP/year, but this seems rather low. Research for Holiday-Rentals.co.uk earlier this year put the figure at

  • 2092 GBP/year, including spending money and holiday wardrobe.

For the couple alone, we’re looking at very basic outgoings of around 18 000 GBP/year, including clothing, car costs and leisure money.

However, kids are expensive. Research published in January 2009 by Liverpool Victoria Friendly Society found that the cost of parenting one child is almost 200 000 GBP/year (193 772 GBP/year) until the age of 21. This figure includes the cost of education, food, clothing, babysitters, uniform, pocket money, presents and all the other trappings of family life.

  • So for two kids, we’re looking at nearly 20 000 GBP/year.

We’ll assume that Miss and Master Average are dependent, 11-year-old twins, living at home, for the next seven years.

This will need a sum of 140 000 GBP.

However, the years between 19 and 21 are the most expensive (estimated at nearly 40 000 GBP/year). So for three years, the two will cost 240 000 GBP.

Mr.Danny Cox of ‘Hargreaves Lansdown‘ explains that any retiree should aim to be mortgage-free, so you already need a lump sum of 110 000 GBP in the kitty just to clear that.

As well as making sure you can sustain this for — what could be — a very long life, you must always have what Mr.Cox calls:

‘A cash cushion, a contingency and emergency fund.
‘Normally this would be three to six months’ expenditure.
‘For retirees, I think cash balances should be much higher — the chances are that in the early years they are going to spend more (holidays etc).
‘I would work on the basis of 50 000 GBP plus any planned capital expenditure and this assumes that they live within their income.’

To maintain an income of 18000 GBP/year, they will need a pot of cash to invest. Mr.Cox gives a conservative figure (assuming a yield of 2.5 per cent, or 3 per cent after tax):

“For every 100 000 GBP invested this generates 2 500 GBP of income.”

  • Mortgage pay-off: 110 000 GBP;
  • Contingency: 50 000 GBP;
  • Investment: 700 000 GBP;
  • Cost of kids: 380 000 GBP.

To keep them in a very modest, basic but paid-for lifestyle, they’d need a whopping 1 240 000 GBP

Mr and Mrs Average aged 50

When the couple reach 50, something very helpful happens: they become debt-free.

This has a significant effect on the amount they need to maintain their lifestyle. According to finance experts, ‘Your Money Matters‘, the average age that Brits shake off the shackles of debt (not, sadly, including mortgage debt) is 50 years and 90 days.

This knocks down the amount needed each year by almost 3 000 GBP. Also, their mortgage will be closer to 30 000 GBP, having been paying it off at 4 per cent for the last decade.

The average annual outgoings will be around 15 000 GBP/year.

  • Mortgage pay-off: 30 000 GBP;
  • Contingency: 50 000 GBP;
  • Investment: 600 000 GBP.

To keep them in a modest, but paid-for lifestyle, they’d need 680 000 GBP.

Mr and Mrs Average aged 60

By the time Mr and Mrs Average reach 60, they have paid off their mortgage and their debts.

They will probably still need around 15 000 GBP to live a basic lifestyle, but will not need a lump sum to clear the mortgage.

However as it stands, if they have paid enough in National Insurance Contributions, Mrs Average will now be able to draw a state pension, and Mr Average will be able to in five years (assuming the age of retirement stays the same).

Mrs Average’s pension will bring in just under 5 000 GBP/year.

When Mr Average turns 65, this becomes just under 8 000 GBP/year

For the next five years, the couple need 10 000 GBP from their investment.

After this, they need only 7 000 GBP to supplement the state pension.

  • Mortgage pay-off: 0
  • Contingency: 50 000GBP;
  • Investment: 350 000GBP.

To keep them in a very modest, but paid-for lifestyle, they’d need 400 000 GBP.

In reality, today’s 60-year-olds will most likely be reliant on a state pension or combination of state and private pensions.

Some words of warning, however. We are increasingly taking debt into retirement, while living longer.

The average age expectancy of around 80 means very little in relation to 40-year-olds today. Mr. Chris Wicks, financial planner at ‘N-Trust Limited‘ explains, this scenario is very simplified.

“The calculation of the mortgage costs depends on how long is left and what basis it has been set up on.
”As you can imagine, it is likely that a 60-year-old will have a smaller mortgage than a 40-year-old as they will have paid all or most of it off by then.
‘The other problem with the calculation is that you can’t just assume a life expectancy of 80 years.
‘A person’s life expectancy means that they have a 50:50 chance of making or exceeding it’.

The moral of the story is, of course, that Mr and Mrs Average don’t exist. If you’re genuinely considering retirement options, it’s important to seek proper financial advice specific to your individual needs and finances. How much cash do you need to pack it all in? Besides your ability to actually pay for a home your credit is the next most important thing. With few exceptions to the rules you will need at least a 620 credit score to buy a home. The highest credit score you can have is an 850 and the lowest is a 350. A 620 credit score is right there in the middle. It is not a great score but it is also not a bad score either. If you have paid your bills on time for the last twelve months, you have not had any other derogatory credit such as collections, then you will likely have the 620 score or higher.

Previously on this blog…

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