Recent research by NEST (National Employment Savings Trust) indicated that most people considered an income of £15,000 p.a. to be comfortable enough for them to enjoy retirement. The revised state pension is expected to be worth approx £7,500 p.a. meaning that individuals only need to fund the other £7,500 p.a. to achieve this target.
As a guide this equates to a fund of around £150,000; someone aged 25 and retiring at 67 would only need to save around £100 p.m. to reach this (assuming 5% growth).
Putting a spin on things is an age old marketing trick, if individuals can see that it is relatively easy to achieve their goal then they are more likely to buy into the concept. But behind the spin there is often something hidden; in this case inflation.
Inflation
The NEST report assumes inflation is zero (which it won’t be) and because of this the target income is achievable.
However, assuming average inflation of 2.8% p.a. the equivalent income for a 25 year would at 67 be around £48,000!!!!
If the revised state pension doesn’t increase (which it may or may not) then to achieve the target income would cost around £650 p.m.
The reality of this is perhaps harder for people to consider.
The other point missed in the spin is whether this is enough money to live on in retirement.
Income
Retirement patterns are changing.
Longevity plays a big part in retirement planning. In the late 1940s when the state system came into force most people didn’t expect to survive past their 65th birthday, now life expectancy can be 20 to 30 years after the state retirement age of 65 (currently). £15,000 at 65 will not provide the same ‘buying power’ at 95.
Secondly the assumption has always been that at retirement, any mortgage has been paid off and therefore income can be reduced to reflect lower outgoings. If more people are excluded from owning their own property then they will need to continue to rent even in retirement. This means that they cannot afford a reduction in income.
Putting this into practice; the average earnings in the UK are £26,500 gross; this delivers around £1,747 p.m. (net). Achieving a target income of £15,000 would reduce this down to £1,096 p.m. (net).
Assuming inflation of 2.8% the actual value of this in real terms would be around £7,764 (gross) and with 20 years in retirement this income will only go one way.
If we consider a society of renters then we can quickly work out that the maths doesn’t stack up.
Planning
There are two choices – firstly to remain comfortably deluded until there is nothing that can be done, or to tackle the problem head on.
Budgeting and financial plans are the only way anyone can plan effectively for their retirement. Individuals can do this themselves or they can get professional help, however the longer this is ignored the worse the problem will get.
The first question is, ‘what is your money currently being spent on?’ and secondly, ‘what is needed in retirement?’ This identifies surplus cash as of now which hopefully will fund what is needed in retirement. Planning is about thinking what an individual wants to do – is it simply to survive, or is it more, and how to sustain the income in retirement? The figures will be in today’s terms but inflation must be considered as this makes a big difference.
Conclusion
If the NEST report had indicated that we need to invest £600 a month to achieve a comfortable retirement most people would give up now. The reality is that this is likely to be the figure that people should be investing, but for most this is simply not possible.
A financial plan will help because there are many different factors to consider when working out what income is needed and how to achieve this, but to just accept something at face value leads to being ‘comfortably deluded’ and by the time you really need to do something about it, it will be too late.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.