Why £50,000 Isn't Enough

Saving for the future is like a three-tier wedding cake. I came up with that analogy a few years ago and I still use it today when chatting to friends who ask me questions about their general finances.

The top tier - the smallest one - represents your day-to-day expenses. The second tier represents short-term goals such as a saving up for a car or a deposit for a house. The bottom layer is your long-term savings - the bit that provides the foundation for the future, that is the least accessible and which should be left until the proper time has come.

So, do you think a lump sum of £50,000 is enough of a solid foundation to finance your retirement years? Apparently, a fifth of the UK population believes they will need even less than that in order to enjoy a comfortable retirement, according to a survey from Friends Provident.

Let's look at how much that pension pot would actually generate and see how comfortable people would really be.

First of all, £50,000 would generate approximately £45 a week after tax in today's money. The current basic State Pension is £84.25 per week which, assuming enough National Insurance Contributions have been paid to ensure full entitlement, would give somebody with a £50,000 pension pot just under £130 a week to live on.

Not only is that less than £7,000 a year to live on, it's also less than the minimum wage, which for an average working week brings in £162.80 after tax.

True, you probably won't have a mortgage to contend with or children to finance and you could, of course, move to a smaller property or release equity from your home to help balance the books, but you'll probably agree that £130 a week is not enough to enjoy a 'comfortable' retirement.

So, how much is enough? Assume that as a ballpark figure, a pot of £100,000 should produce an annual income of around £5,000 and then calculate how many pots of £100,000 you need to truly enjoy a comfortable retirement. Scary, huh? Perhaps it's time to start baking that bottom tier of your cake!

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