DO YOU HAVE ENOUGH TO RETIRE?: Get a fat lump sum and never go to work again? If this is your dream, it may be time to get real, says Simon Hinde. We're all living longer, travelling further and buying more, and you may find your fat lump sum turning rapi

DO YOU HAVE ENOUGH TO RETIRE?: Get a fat lump sum and never go to work again? If this is your dream, it may be time to get real, says Simon Hinde. We're all living longer, travelling further and buying more, and you may find your fat lump sum turning rapi

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Last Updated: 31 Aug 2010

Tear up your season ticket. Burn your briefcase. Send your business suits to Oxfam: you won't be needing them any more. Clear your desk, shake hands with your boss for the final time, say a fond, if slightly smug, farewell to your colleagues, pack up, move on and spend the rest of your life doing whatever it is you really want to do. The money's in the bank and you'll never have to work again.

This is a recurring dream for many of us, according to a survey by Abbey National. One in five of the people asked admitted to fantasising every day about coming into enough cash to leave work for good, and a further third confessed to having such thoughts at least once a week.

More and more of us are actually realising that dream, thanks to a combination of factors, including the National Lottery (which has created more than 1,000 millionaires), City bonuses and the long stock market bull run, which left a lot of quite ordinary private investors sitting on some quite extraordinary sums of money. Look at Carol Galley, the famous Merrill Lynch Asset Management 'Ice Maiden', who recently announced that she was throwing in the towel aged just 52 and with an estimated pounds 20 million in the bank.

But the biggest contributor in the early retirement boom, according to Colin Ledley of Standard Life, is the combination of soaring house prices and changing demographics. 'Parents live longer these days and their houses may well be worth substantial sums when they die, by which time their children are likely to have paid off their own mortgage, or most of it.'

So when the big cheque finally lands on the doormat, and your gaze turns to the horizon beyond work, how can you be sure that it is enough to let you make the big break and live the life of your dreams? Would a million do it? Half a million? How do you even begin to work it out?

In its survey, Abbey National also asked how much money people thought they would need to give up work immediately. On average, they said the amount that it would take to persuade them to clear their desk and never work again was pounds 237,000.

To most of us, pounds 237,000 is indeed a lot of money. It's about 10 times the average annual wage and more than twice the value of the average house.

But when it comes to the sum needed to provide for a comfortable retirement, pounds 237,000 is almost certainly a tragic underestimate, as we shall see.

The survey found that different age groups had different ideas about what sort of amount would be sufficient. Those between 20 and 30 thought pounds 226,000 would be enough; those in their 30s averaged pounds 238,000; those in their 40s, pounds 275,000; while those between 50 and 55 thought pounds 208,000 would be enough. (It needs to be remembered that 21 million adults in the UK have less than pounds 500 in savings.)

I asked James Higgins of financial advisers Chamberlain de Broe if people who come into lump sums have an exaggerated sense of the standard of living it will support. He laughed: 'It's not just customers. A lot of financial advisers make the same mistake. The markets were so strong until 1998 that it was relatively easy to make money. Now it's a lot more difficult. The last year in particular has been a real eye-opener for a lot of people.'

Even so, for many people who come into some cash the first reaction is to scream 'I'm rich' and assume money will never be a problem again. Higgins says: 'They think they can just put it in the building society and take from it whenever they want. So someone who has got pounds 150,000 assumes it's a lot, but by the time they've paid off their mortgage, the money won't go very far at all.'

These days, you can expect to live to 75; rather longer if you look after yourself. If you're 40 now, that means your windfall has got to last you 35 years: pounds 237,000 divided by 35 is pounds 6,771. Now, you could eke out your money a little further by sticking it in the building society to earn interest - say 5% a year. But this probably won't do much more than compensate for inflation.

Even at 50, pounds 237,000 won't allow you to retire into the lap of luxury.

To save you doing the sums, it's about pounds 9,500 a year. And, of course, you could live until 80 ... or 90 ...

OK, so you invest the money. Trouble is, you don't know how well your investments are going to perform. They might produce the money you need for the lifestyle you expect. They might not. They might even go down in value. And, incidentally, it's not a very good idea to invest money that you need to get your hands on at short notice: you may have to cash it in when the market's low. In that case, maybe you could invest some of it, the part that you won't need for a few years. Maybe that will produce enough to keep you in fabulous luxury for as long as you live.

Maybe. But look at what's been happening in the markets recently and what people expect to happen over the next few years. The boom years are over, for the time being at least, and many experts expect a recession, starting in America and spreading across the world. In today's uncertain markets, it's vital to be realistic about the return you'll get on your cash. Says Colin Ledley of Standard Life: 'People tend to think that they can get a 10% income from their money, but you're not going to get that these days. It's best to assume an income of 2% or 3% in the early years to avoid eroding your capital and to allow for the effects of inflation in the longer term.'

On this basis, a pounds 237,000 windfall could end up producing as little as pounds 5,000 a year - enough to finance a subsistence-level lifestyle, but nothing more. Even pounds 1 million, on this admittedly conservative assumption, would generate only pounds 20,000 a year.

Another option is to take out an annuity. You hand your lump sum to an insurance company, which, in return, promises to pay you an income for as long as you live. It's like a wager between you and the company: you bet you're going to live longer than average; the company reckons that you're going to die young.

The attraction of an annuity is that you know you're never going to run out of cash. The disincentive is that a healthy-looking lump sum often translates into rather an anaemic annuity. At 65, pounds 100,000 will probably buy you pounds 9,000 for life: if you're 55 the same sum will purchase an annual income of as little as pounds 7,000. If you want to index-link your annuity to protect it against the effects of inflation - which is highly recommended - it will cost you extra.

These are only guidelines, of course. The amount your particular windfall will generate will depend in part on your circumstances and your attitude to risk. A good financial adviser will be able to provide more detailed projections.

The next step is to work out whether it is enough. A generally accepted rule of thumb is that an annual income of two-thirds of your final salary represents enough for a comfortable retirement. In the good old days of paternalistic employers, it is what you could expect to receive if you stayed with the same company for life.

Use it as a benchmark, but bear in mind that if you've still got a big mortgage and school-age kids, for example, you might want to set your sights a bit higher. If you envisage selling your house and moving to a bungalow in Bexhill, perhaps you can aim a bit lower.

Sit down with a pen and paper or a computer spreadsheet and work out your assets and liabilities. In one column, your pension (if you have one), the profit you will make if you sell your house and move somewhere smaller, income from other sources; in the other, your mortgage, school fees, the monthly supermarket shop, holidays, the car. Are you likely to want to buy a bigger house or to splash out on a sports car? Write it down.

If you are used to a company car, health insurance and an expense account, remember that, come retirement, you will have to pay for all these things out of your own pocket. Try to project yourself into the future and work out as accurately as possible what your future financial needs are likely to be once you give up work.

At the moment, you are probably spending long hours in the office, during which you are not spending a great deal of money. When you retire, you will have time on your hands. Now, you may be one of those people who can happily spend hours reading an improving book or doing a bit of needlepoint. If you're not, you'll be digging into your pocket.

Golf, travel, going down the pub ... these are all, to a greater or lesser extent, cash-devouring activities.

Retirement today is a big, keep-up-with-the-Joneses business. Pensioners no longer like to sit around with blankets on their knees moaning about the price of ham; they want to take flying lessons, go windsurfing and have holidays in places like Borneo.

The decision to retire early is partly a financial one, of course. But it is also about personal inclination. Some people are keen to give up work as soon as they can afford to, because their job offers little in the way of stimulation, or they have something else they would far rather do. Others cannot imagine life beyond the nine-to-five routine and carry on in employment as much for the love of it as for the money.

But if you are tempted to jack it all in, look at the newspaper articles, television programmes and specialist magazines that are devoted to painting a picture of the idyllic retirement. Think about how much that ideal lifestyle might cost, take some expert financial advice and don't let a lump sum lure you into giving up work for a future of scrimping and saving.

THEY'RE THINKING ABOUT THROWING THE TOWEL IN ...

INVESTMENT BANKER: pounds 1.5 MILLION AT 35

Nigel is 35. Has two young children, two and four, destined for private education. House in Clapham and Suffolk. Fed up with job and wonders if his pounds 1.5 million bonus is enough to retire on.

Well, if he wants to put those children through private education then he's going to need to set aside pounds 300,000 of that pounds 1.5 million. From what he has left, he could get a sustainable pounds 36,000 a year, if invested. For a man with his lifestyle, that's probably not enough. So the short answer is that he cannot really throw the towel in yet. If he gets another pounds 1.5 million bonus next year - which in the current climate is probably less likely - then he could think again.

ADVERTISING CHIEF pounds 3 MILLION AT 45

Sally is 45 and divorced, with a five-year-old daughter. She sold her company and, after her messy break-up, owns a flat in Baker Street and wants to move to Somerset to write a novel. She has pounds 3 million in the bank.

This looks far better. Life is cheaper in Somerset and pounds 3 million would leave her comfortably off after it's invested in gilts, equities and bonds. An income of pounds 90,000 a year is achievable. I'm assuming the novel won't prove to be a particularly big earner.

REDUNDANT MANUFACTURING DIRECTOR: pounds 500,000 AT 55

At 55 Harvey lost his job in Wolverhampton. His kids have left home and he and his wife are happy to live quite modestly. Their house is paid for and they do not want to move. What kind of life can they expect on his redundancy package, pension and their savings of pounds 500,000?

Careful budgeting is vital here and the real question is, how modest is modest? If he's been on pounds 80,000 then a fair bit of trimming may be necessary. They may have to consider downgrading their house. This one is possible but touch-and-go.

RETAILER: pounds 250,000 AT 60

At 60 George has finally sold the family business, a record shop in Norwich. He didn't get much for it, enough to cover his debts and leave him with pounds 250,000 after selling the shop and his flat above it. George suffers from angina and has no pension. He has holidayed in Spain for years and dreams of a life in a beach-hut in Galicia. After he has spent pounds 50,000 on that, what will he have to live on?

The first thing is to do something about his pension. He can put back-payments into his pension and get tax relief. This can extend back over the last seven years. If he can put in a total of about pounds 100,000, he'll get a tax-free lump sum of pounds 25,000 immediately. (He needs to be quick, though. This window of opportunity will be closed after 31 January 2002.) He can also get an impaired life annuity because of his ill health. Overall, I'm a bit concerned things may be tight for George. What's the healthcare in Galicia like?

COMPANY DIRECTOR: pounds 5 MILLION AT 60

Sheila, who is now 60, lost her job as finance director of a Plc. She has recently married her retired tennis coach and they want to travel the world. She has a house in Chelsea (no mortgage) and assets of pounds 5 million.

She's going to have a fab time. At this level, tax efficiency is very important so she'll need proper advice on ISAs, PEPs and CGT allowances. If she wants to go abroad then offshore investments are a maybe. There are all sorts of clever things she can do, including giving her new husband some money, but she needs to watch out for inheritance tax as far as leaving money to her children is concerned.

COMPANY CHAIRMAN: pounds 7 MILLION AT 65

Sir Richard is 65 and bored with his non-executive directorships. He is stopping work but wants to continue with his golf, his yacht and his regular table at the Savoy. His wife and daughters don't want to give up their horses and he wants to keep his houses in Surrey and Tuscany.

He did well in his business career, making a cool pounds 7 million. He also has a secret mistress-plus-child in the Caribbean for whom he has bought a home. He's got a lot of mouths to feed. Poor man - all those women ... If he falls off his perch tomorrow, it would be wise to have set up a substantial life assurance premium paid from an offshore account to be left in trust to the mistress. There are likely to be trusts for his daughters and he'll have regular discussions with his stockbroker. With that kind of money he can generate pounds 250,000 a year with ease.

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