We’re always hearing that we are not saving enough for retirement, but how much is enough?
The simple answer is as much as we can afford. Many of us can expect to spend several decades in retirement, and if we retire early, we could actually spend more time as retirees than we did as workers.
So how much do we really need?
You need a big pot
Estimates of pension pots vary. According to research by Aegon the average pension pot in the UK currently stands at nearly £50,000. Men have an average of £73,600, compared to just £24,900 for women. But this figure is for all workers. Those approaching retirement should have considerably more saved. Those aged 55-65 may currently have an average of £105,496.
But this might not be enough. A £100,000 pension pot might provide an income of about £5,000 a year in retirement. The exact amount would depend on circumstances such as your health, precise age location and how you chose to draw your income.
Former government pensions minister Steve Webb is now a director of the pensions investment company Royal London. According to a report he has authored, ‘Will we ever summit the pensions mountain?’, the average person will have to save £260,000 over their lifetime to enjoy a basic income in retirement.
The report, where Webb is director of policy, assumes that the average person will need to generate an income of just over £9,000 a year to top up their state pension at 65. But to achieve that income and get a buffer against inflation – they will have to save more than a quarter of a million pounds.
That figure may be a minimum. Those who fail to buy their own home and so face a lifetime of renting will have to save far more. The Royal London report projected that around one in three retirees would be renting and would need an average of £6,554 a year to pay private landlords. This additional cost means they will need £445,000 to fund their retirement.
In a gloomy assessment, Steve Webb said most savers were likely to fall substantially short, and those who relied on the government’s auto-enrolment scheme were likely to accumulate only half the amounts they needed.
“We can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning,” he said.
Things are getting more difficult
Because we are living longer, and because of historically low interest rates the income from pension savings has fallen to rock-bottom lows. A pension pot generates a smaller income than it used to.
In 2002/03, a pension pot of about £150,000 would have delivered a private pension of £9,000 a year through retirement. Today, you would need £260,000, and things don’t look as though they are going to get any easier.
What can you do?
You probably can’t rely on an occupational pension scheme to provide the level of income you need in retirement. The only solution may be to set up a private pension and make saving a priority.
How much you will need to save will depend on your age, and how much you can expect from your work pension and state pension together. The important thing to be aware of, is that whatever your age, you need to start now. The sooner you start investing in your future, the longer your money will have to grow, and the less it will cost each month to build up the sum you need.
Getting help is essential. At Continuum, we will be very pleased to provide it.
The value of your pensions and investments can fall as well as rise and you may get back less than you invested.
theguardian.com – Average person will need £260,000 for retirement, says report – 16th May 2018
msn.com – Average person will need £260,000 for retirement, says report – 16th May 2018
aegon.co.uk – £300,000 pension pot required to maintain lifestyle – 3rd January 2018
royallondon.com – ‘Will we ever summit the Pension Mountain?’ – 16th May 2018