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Could you live on the national minimum wage in retirement?
Failing to save for retirement could mean you end up scraping by on the state pension – the equivalent to living on the miniumum wage.
by Michelle McGagh on Jul 02, 2012 at 12:29
If saving into a pension is at the bottom of your to-do list, ask yourself whether you are capable of living the retirement you want to on the national minimum wage.
Currently the national minimum wage is £6.08 an hour for those aged over 21, and someone working full time (35 hours a week) on this wage takes home around £11,000 a year before tax.
Those who are relying on the state pension to fund their retirement cannot expect to have much more in their pocket, according to Ray Chinn, head of pensions at insurer LV=.
Based on the £140 a week flat-rate state pension that is being introduced next April, plus universal benefits and credits given to the elderly, Chinn estimates that the state pension is equivalent to around £11,000, the same as living on the national minimum wage.
‘People need to ask themselves whether they can afford to live on minimum wage, and how much more they need to save on top of it,’ said Chinn.
How much will I need?
Working out how much income you will need each year to live on in 40 years' time can be a daunting task, but Chinn recommends aiming for two-thirds of your current salary, assuming that by the time you retire you will have paid off the mortgage and have no dependents.
In the UK, the average wage is just over £25,000, which Chinn says would realistically equate to needing £18,000 income each year in retirement.
‘In retirement you can probably live on two-thirds of your current income because you have paid off your mortgage and things get a bit easier when you retire, as long as you don’t have any dependants,’ he said.
‘The average wage in the UK is £25,000, so you would need £18,000. You need to ask where you will find that extra £7,000 a year on top of the state pensions.
‘As a pot of money, you would need around £100,000 to fund £7,000 a year in retirement.’
For those who haven’t made retirement saving a priority, Chinn said they have three options: ‘Work longer, save more, or live on less.
‘There is no silver bullet. We are seeing people work longer through retirement and so they are funding that extra £7,000 through a part-time job,’ he said.
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