After years of rising costs, a reduction in the amount you need to set aside for a basic retirement is welcome.
More than three quarters of savers don’t know how much they’ll need for retirement, according to the Pensions and Lifetime Savings Association (PLSA). But there’s some good news in the PLSA’s latest report on the level of income you need in retirement. While the amount you need to save for a moderate retirement has increased, lower energy prices have led to a reduction in the level of savings you need for a basic standard of living in retirement, the new figures show.
The actual cost of the retirement you want will of course depend on all sorts of different factors. You can use our free comparison tools to compare fees and select a platform that suits you best for retirement goals.
Here we pick out some rules and guidelines that will make it easier to plan ahead, starting with the PLSA’s calculations.
The industry estimate
A few years ago the PLSA – which represents UK pension schemes – set out some National Retirement Income Targets to give people an idea of how much to save. Based on research with Loughborough University, it developed estimates for the cost of three different levels of retirement living standards: minimum, moderate and comfortable.
It estimates that a couple will need to be able to spend roughly around £21,600 a year in retirement to achieve the minimum living standards – down from £22,400 last year – £43,900 a year for moderate standards (up from £43,100 last year) and £60,600 a year for a comfortable retirement (up from £59,000). For single people the figures are £13,400 (previously £14,400), £31,700 (up from £31,300) and £43,900 (up from £43,100) respectively.
The PLSA believes an ongoing savings rate of about 12% is required for a modest retirement income. Check out the PLSA’s Retirement Living Standards website for more details.
The milestone rule
One approach is to have a multiple of your salary at certain ages. The table below is a rough guide of how much you should have saved by certain age milestones. For example, by age 35, you should have twice your annual salary saved. By age 40, you should have three times your annual salary saved. By age 65, you should have eight times your annual salary saved.
| Age | 35 | 40 | 45 | 50 | 55 | 60 | 65 |
|---|---|---|---|---|---|---|---|
| Saved | 2x | 3x | 4x | 5x | 6x | 7x | 8x |
Don’t panic
If you haven’t saved anywhere near these figures, don’t worry. You’re not alone. Most of us haven’t. But we’re not just throwing big numbers around to make us all feel bad about our pension savings. There’s a formula behind it. It assumes you want to retire at 65 and that you’ll need a nest egg to live on for the next 20 or 30 years after you stop working.
If you’re currently earning £35,000 a year then you should aim to have savings of £280,000 by the age of 65. If your earnings are £50,000 a year, then you should aim to have a pension pot of £400,000. That should allow you to maintain a similar standard of living for the 25-30 years in retirement.
The 25 rule
An alternative to the milestone rule is the 25 rule. All you need to know is how much you will spend (or plan to spend) over a year in retirement and multiply that by 25. For example, if you think you’ll spend £20,000 a year, you’ll need 20,000 x 25 = £500,000.
It’s not 25 times your annual income, but 25 times your annual expenditure. Working out how much you expect to spend in retirement can be tricky – some big expenses such as mortgage, pension saving, kids (hopefully) will disappear, but new expenses (holidays, travel, grandchildren) are likely to appear. Start with your monthly bills, food, council tax and leisure. It depends on what you want to do, but if it still looks like a horrifyingly big number then get saving now, yes right now.
Don’t stop now – start!
A pound saved today will make a huge difference in 20 years’ time, so don’t lose hope – start saving more if you can. Don’t forget that you’ll receive a state pension too (the full state pension is currently £221.10 a week, rising to £230.25 in April). The best way to get back on track with your pension savings is:
Pay in as much as you can afford into your workplace pension as your employer will also match your contributions, which can really boost your annual savings.
Aim for at least 15% of gross income (don’t forget that you get tax relief on your contributions).
Review your investments on an annual basis to ensure they’re growing as expected. Remember that risk is a long-term friend – being too cautious with your long-term investments can be bad for your health and wealth.
Use our free comparison tools to compare fees and select a platform that suits you best.
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