Am I saving enough for retirement?

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“£10,387 is the average cost of living for a pensioner in Britain”.

On my recent flight back from France to the UK, I was thumbing my way through the Business Airways magazine: Business Life. On page 44, the above statement struck me. It made me think.

• What does it include?
• Is this a lot of money?
• How much of a “pension pot” will I need to have this income when I retire?
• Am I saving enough for retirement? Am I currently on course to meet this requirement?

 

 

What does it include?

Following the provided source in the magazine, the information comes from “Key Retirement Solutions”, which leads us to this article:

Annual cost of being a pensioner is £10,387

The statement comes from the company’s analysis of 2013 ONS (Office of National Statistics) family spending data. First of all, I think that we should check the ONS data to ensure that there has been no bias in this “analysis” of the data.

An analysis of the data shows me two things:

1. Table A9 – The average total expenditure for all individuals over 65 => £10,863 per person
2. Table A11 – The average total expenditure for all households over 65 => £17,697 per person

This tells me two things. Firstly, the data for individuals is fairly accurate as quoted in the article. However, it is important to note that a lot of pensioners do not live alone and shared expenses make household costs less.

Therefore, in the following analysis, we shall be using the average between the two figures, per person, to represent that at least half of pensioners live as part of a couple. This would give us an annual figure of £9,855 – which we shall round to £10,000 for future analysis.

As you can see from these expenses, it includes almost all expenditure groups that you could imagine.

 

 

Is this a lot of money?

Well, this is the average expenditure for a pensioner, and as we have come to learn on moneystepper, the average is usually sufficient.

However, I would ask you one simple question. Given that you have worked your entire life until this point, are you happy to be average? Are you happy for your income to be only sufficient to cover these expenses? I hope not.

Out of some of the primary categories, I noted the following:

• £49 per week on food & non-alcoholic drinks
• £6 per week on alcoholic drinks
• £2 per week on footwear
• £10 per week on purchase of vehicles

Personally, when I retire, I want to be spending much more than these amounts on these categories.

 

What “pension pot” will create this level of income when I retire?

We are going to ignore the concept of income drawdown (whereby you live on both the income generated from your retirement savings and a percentage of the principal each year, ideally dwindling this down to zero before you die). However, for our calculations, we shall ignore this concept because it estimates our life expectancy (which is not easy with today’s advances in medicine and technology) and is seen as risky by some if markets were to tumble.

Instead, we shall calculate how much we would need invested when we retire in order to produce £10k of income each year.

Firstly, we need to estimate our return on investment each year. Based on long-term historical data, we can assume that our annual return from property or the markets can be over 10%. However, we shall assume that we become slightly more risk adverse in retirement and only obtain an annual return of 7% and an annual inflation rate of 3%.

Therefore, our real rate of return is 4%.

We can then simply calculate our investment pot requirement by dividing our annual income requirement (£10k) by the real rate of return (4%). This gives us a requirement of £250,000. This way you can live only on the income generated by your pension pot.

Wow, that’s quite a lot of money. That doesn’t include your own house, your own cars, etc. It only includes your invested money. I wonder how many people approaching retirement have £250,000 put away. Not a huge percentage I would imagine.

 

 

Am I saving enough for retirement?

Don’t panic. It’s not as bad as it seems.

I will use myself as an example: I’m 29 years old, and will assume an annual real rate of return (after inflation) of 7%, which is definitely achievable through passive investment over such a long term.

I can look at this in two ways:

• How much do I need today (if I contribute nothing between now and retirement) to have £250k when I turn 65?

I have 36 years left until retirement (I really hope to retire before then by the way!!). Today, I need £21,900 invested towards retirement in order to earn the £10k average annual income by the time I reach retirement. This is a much more manageable figure, compared to just thinking about the £250,000 figure. However, I would hope to contribute at least something towards my retirement each year for the next 36 years, so this would hopefully be the worst case scenario.

• If I have nothing invested for retirement today, how much do I need to invest each year to have £250k when I turn 65?

Again, with 36 years left until retirement, if I invested £1,680 every year, I would have the retirement pot required to generate the £10k average annual income when I’ve retired. Even if I hadn’t started investing at all before today, I can put away just £140 per month, or £32 per week to survive retirement. If I factor in the fact that pension contributions are twinned with tax support, this will probably only be about £25 per week coming out of my post-tax salary. If you have a matched pension scheme with your employer, this falls even further.

 

What about you – are you saving enough for retirement?

My situation above provides you with an illustrative example.

If you are wondering how much you need to be average, then put your figures in the form below to work out your personal requirements:

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