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How much do I need to save for a decent retirement?
A recent survey by The Lolly showed one in four people want a £20,000 income in retirement. We've found out how much you need to save to make this happen.
by Michelle McGagh on Apr 05, 2012 at 09:30
Saving for retirement is easy to put at the bottom of the to-do list but for every decade that you wait, you will have to double the amount you save in order to achieve a relatively modest pension.
A survey by The Lolly of 1,000 people showed a quarter of people would like a pension of £20,000 a year. This currently requires pension savings of around £300,000 to provide. And that's assuming you purchase the most basic annuity with your savings.
An annuity is a life insurance contract that you buy from an insurance company. In return for your pension savings the insurer agrees to pay you a pension for the rest of your life. How much that is depends partly on the type of annuity and how long the insurer expects you to live.
In the table below we've assumed a person buys a single life level annuity which has no protection against inflation and no continuing widow’s pension. As we will show, more generous annuities will cost you a lot more than £300,000.
How much do I need to save to get £300K?
It all depends on your age. The older you are the more you will have to put aside each month, and the difference is significant.
Figures from Standard Life show how much you will have to save each month if you start saving from the age of 20, from 30, from 40 and from 50. The table below shows two different growth rates for your savings of 5% and 7%. A 1% annual management charge has been factored in.
The higher the growth rate, which can be achieved through a riskier investment strategy, the less you will have to save each month.
For those starting at 20, 30 and 40-years-old a retirement age of 68 has been assumed.
|Age start saving||Growth @5%||Growth @7%|
The sums involved are already significant but if you want to buy an annuity that is more complex the amount you need to save shoots up again.
If you want an annuity that increases your income 3% a year in order to keep up with inflation, you would need a pension fund of £400,000. To achieve this, monthly payments would have to increase 33%.
To add a 50% widow’s pension, which means your spouse or partner would continue to receive half your monthly income payments on your death, you would need a fund of £330,000, a monthly payment increase of 10%.
And if you wanted your annuity to both keep up with inflation and provide a widow’s pension you would need a pension fund of £440,000. To get this you would have to increase your monthly payments by 45%.
Cost of delaying
The Pensions Policy Institute estimates that more than six out of 10 people aged 18 to 65 are not saving for retirement. Putting off saving for your financial future has a huge impact; every 10-year delay doubles the amounts you need to set aside to provide the target income.
Another way of looking at it is that every decade you delay saving halves your retirement income.
Julie Russell, head of customer relationships at Standard Life, said most people would struggle to live on the state pension, which the coalition is planning to increase to a £140-per-week flat rate from 2014/15.
‘The more we delay, the higher the monthly payments are going to be to provide the target income, which can make it very difficult to achieve. So the message is definitely start to save for your retirement as soon as you can and that will give you peace of mind now,’ she said.
Facing up to the reality
Shane Mullins (pictured), managing director of Fiscal Engineers, an independent advisory firm in Nottingham, said people needed to face the reality of living longer and poorer investment returns, and start saving for a pension earlier.
‘People think that [saving for retirement] is tomorrow’s problem and when they finally focus on it, it is too late and the rubber has already hit the road,’ said Mullins.
‘The financial situation we are in is not getting any better and you can’t rely on the state.’
Many people are putting off saving for a personal pension. A Prudential report shows one in six will retire with no pension and will rely on the state to fund their retirement but there is an equally big problem with people not saving enough.
Russell said people often underestimated the amount of money they would need to fund the lifestyle they want in retirement.
‘There is the concern that even those who are already investing in private pensions aren’t investing enough,’ she said.
‘People can find it difficult to work out exactly how much income they will need each year for retirement, but it is worth sitting down and estimating this in order to have an idea of the size of pension pot you need to build up and the contributions you need to make each month to achieve this.’
Mullins agreed that people should save more for their retirement and urged them to follow his four simple rules for financial success.
‘The reality is people should save a little, spend less than they earn, stick to a budget and remember that instant credit equals instant debt. Everyone needs the basis of a financial plan; these simple rules equal simple outcomes,’ he said.
Jason Witcombe, a director of London-based independent advice firm Evolve Financial Planning, said the demise of the final salary pension scheme in the workplace would hit savers hard.
‘A massive problem that we are going to face is that final salary pensions are closing. [With final salary schemes] your retirement was sorted [but] that is all gone and it is not dawning on people how much they need to save just to get £20,000 a year [retirement income],’ said Witcombe.
He added that people start saving later in life, which cut the amount of time they have to build up a decent pension.
‘The trouble is you leave university with debt, you need to get rid of that, then you will need to save for a deposit [for a house] and then pay you mortgage off – there isn’t much time to save for retirement,’ he said.
More about this:
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- The truth about pensions: a home is not a pension
- The truth about pensions: are your plans realistic?
- My financial life: why I have to work in retirement
- Most Brits still relying on state to fund retirement
- Pensions v ISAs: which is best for retirement?
- Can your property replace the need for a pension?
- Retirement: should you release cash from your home?
- The unhealthy truth about a long retirement
- When should I realistically plan to retire?
- Fiscal Engineers
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