If you think the State Pension will be enough to allow you to live comfortably in retirement, you could be in for a big shock.
A recent study of several thousand potential pensioners showed that most people do not understand how much money they are entitled to in retirement.
Furthermore, most respondents indicated that the level of the State Pension is not enough to sustain their current lifestyle in retirement.
Most retirees are entitled to the new State Pension of £168.60 of a week or £8,767.20 a year. The actual amount you will receive will vary due to things like your National Insurance contribution record and whether or not you are entitled to other allowances and reliefs. Nonetheless, the general consensus among retirees seems to be that this meagre income is not enough to live on comfortably in retirement.
Indeed, according to some surveys, most retirees and future retirees believe they will need a pension of least £20,000 to £25,000 a year to be comfortable. That’s substantially more than the level of income offered by the state.
A £250,000 pension pot
After taking all of the above into account, I think you need pension savings of at least £250,000 or more to be able to live comfortably on the State Pension. According to my calculations, to generate an income of £20,000 a year, you will need to have just over £200,000 saved by the time you come to retire.
Assuming a retirement age of 68 and an average life expectancy of nearly 90, this pension pot should enough to provide you with an annual income of around £11,233, which, when topped up with the yearly State Pension, will give you an annual income of £20,000.
To achieve an annual income of £25,000, I calculate a saver will need to have to put away £298,000 by the time they come to retire. This pot will be enough to give an annual income of £16,233 from the private pension, topped up with £8,767 from the State Pension to provide an overall yearly income in retirement of £25,000.
Time to get saving
Reaching nearly £300,000 in pension savings might seem like a daunting prospect, but if you get started early, it is relatively straightforward to hit this target.
And the best way to make sure you reach the target is to invest your money. Indeed, if you don’t invest, you’re putting yourself at a severe disadvantage because stocks have generated returns around five times higher than cash over the past few decades.
Over the past decade, the FTSE 100 has generated an average annual return of around 8% per annum, that’s including dividends paid to investors. On this basis, if you invest your money in a low-cost FTSE 100 tracker fund, I calculate you will need to save roughly £747 a month (including management fees of 1% p.a.) for 20 years to hit the £300,000 savings target.
The sooner you start saving for this target, the better. Assuming an average annual return of 8% for three decades, you only need to put away £375 month if you want to achieve the £300,000 savings target.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.