This is one of the most common questions in the world of pensions, and unfortunately it is one which has no simple answer. The amount we need to save is different for everyone and it will depend, amongst other things, on the following:
- What type of retirement are you planning – what income will you require?
- Your age now and the age you are planning on retiring i.e. how long do you have to save?
- How long will your retirement be – what is your life expectancy?
- What other savings or sources of income will you have in retirement?
In this article we look at some of these points in more detail and outline some examples of how much can be accumulated at different levels of monthly savings, over different savings terms.
What level income will be required in retirement?
This will depend on the standard of living you are aiming to achieve. Broadly speaking, a retirement income that is two-thirds of your pre-retirement salary would generally be expected to provide you with a similar standard
of living that you enjoyed whilst you were working. Expenditure usually falls in retirement as you will no longer be contributing to a pension / savings, you are more likely to have paid off a mortgage, you have no work related costs and you will not have to pay national insurance contributions on your savings or pension income.
The average earnings of full time employees on the Isle of Man is £29,000 pa. Therefore, if you are aiming to achieve two-thirds of this figure in retirement your savings and pensions would need to provide you with £19,300 pa.
How much will I need to save to provide income of £19,300 per annum?
The State will provide you with some pension income in retirement, however this is only paid from State Pension Age, which for anyone born from 1978 is their 68th birthday. There will be further increases to State Pension Age as we are all living longer. An individual with a full National Insurance record could expect to receive approximately £180 per week (£9,360 p.a.), although some may receive more, some less depending on their specific circumstances. Therefore, if you are aiming for income £19,300 pa you will need to save enough in your personal pensions, work pensions or other savings / investments to provide this level income until state pension age, following which your savings will need to top up your state pension by approximately £10,000 pa. If you are fortunate enough to have a final salary pension this will also provide you with some guaranteed income when you retire.
The amount you need to save to generate this level of income will depend on how long your retirement is expected to be and also whether or not you want guaranteed income in retirement. The table above shows average life expectancy men and women at different retirement ages:
The above figures are averages. We can say that for a woman who retires early at age 55, her pensions and savings are, on average, going to need to provide her with an income for the next 33 years. However, there is also a 1 in 10 chance that she will survive to age 100, so potentially the pensions and savings will need to last for 45 years.
The amount you need to save in your pensions to buy a guaranteed income for life (an annuity) is usually higher than the figure required to provide a non-guaranteed income (this is referred to as income drawdown). Other options such as inflation linked increases and surviving spouse’s pensions also increase the costs of an annuity.
Below is a comparison of the amount that you would need to accumulate to provide a guaranteed, level income (annuity) of £10,000 per annum for life compared to the amount that could be expected to provide non- guaranteed income (drawdown) of £10,000 p.a. based on average life expectancy. It is important to note the risks associated with the income drawdown – the income may fluctuate depending on investment returns, you may get less income than you would have with an annuity and there is a risk of outliving your pension, if you survive well beyond average life expectancy.
How much should I be saving each month to accumulate a sufficient retirement pot?
This will depend on how much you already have in your pensions, investments and other savings. However, assuming there are no other savings or pensions, the table below provides examples of the level of regular contributions that would accumulate a pot of £200,000 over a range of savings terms.
It can be seen from the table that the total contributions required over the shorter savings terms are much greater than those over longer savings terms. So the message is very clear – the longer you leave it to start saving, the more it will cost you. The sooner you start saving, the better.
If you would like to understand more about your potential income in retirement and if a shortfall exists, we can help you. At Hockney Stevens we use cashflow forecast analysis to help estimate pension income, understand if you need to start saving more for your retirement and project the sustainable rate at which you can draw from your pensions or savings so that you do not run out of money.
The longer you leave it to start saving, the more it will cost you.
