Let’s face it – regardless of all the Instagram filters, none of us is getting any younger with time. The coronavirus crisis has proven yet again how hard it is to plan anything and especially what your life could look like down the line. However, if you follow the maxim that ‘time waits for no one’, you are probably already thinking about retirement.
The question comes down to money — exactly how much will you need in retirement? Simple to pose but for most people, it is very hard to answer, which makes planning for the later part of our lives quite challenging. With the hope of simplifying the planning process, the Pensions and Lifetime Savings Association (PLSA) published the Retirement Living Standard. Developed by the Centre for Research in Social Policy at Loughborough University, it captures the public attitude towards retirement in contemporary Britain. The standards consider three different baskets of goods and services and estimate the minimum amount of money that you will need for the respected lifestyle (minimum, moderate and comfortable).
The minimum income in retirement that you will need is £10,900, rising to £13,200 if you are in London. If you are a couple then the minimum increases to £16,700 (or £21,100 for London). This should be enough to cover all your essentials, like household bills, and leave some for the occasional treat and entertainment.
For a comfortable retirement, with more luxury like travelling abroad, the amount climbs to £33,600 (£36,700 – London) of annual income for a single retiree and £49,700 (£51,500 – London) for a couple. If you would like to be over the minimum standard but cannot afford to be in the top percentiles, you are striving for an annual income that will let you achieve a moderate living standard. For that extra financial security and more fun, around £20,800 is about right or £30,600 for a couple (£20,800 and £30,600 respectively if you are based in the capital).
Do you mean to tell me I can still have fun when I retire?
The simple answer is yes, but that doesn’t take away from the fact that you still need to contribute to your retirement pot before you can reap the benefits. Annoying, I know, but if you are a fraction as competitive as I am then it gives you a target to focus on. Yet we shouldn’t forget that these estimates involve a form of subjective judgement. For example, it is stated that the comfortable standard involves aspects like taking a yearly three-week holiday in Europe, replacing your car every five years or so, and spending around £1,200 on clothing each year.
Of course, we all have a different lifestyle and some of us might consider this extravagant. However, the standards are not inclusive of all costs. For example, it doesn’t take into consideration paying your mortgage in retirement or the need for care support. So, if any of these apply to your circumstances, then the standards may not be as useful to you.
Another thing to consider is the standards are only meant to act as guidance and not a final figure. Meaning, you might not end up having that lavish three-week getaway in Europe. However, the PLSA’s estimates provide a great starting point to gauge whether your savings will sustain your lifestyle in retirement.
Another important point I’d like to raise is that not all your retirement income will have to come from your savings. Well, that is if you have made National Insurance contributions during your working life. Then you will be entitled to a state pension, which is worth £9,339 in the current financial year (so you can subtract that from your target income).
For a single person in London, this translates to a deficit of just over £15,000 to hit the PLSA’s moderate level of income. The question then evolves to how big my pension pot should be to fill that gap.
You can start by checking if your pension provider offers a free retirement income calculator. My current provider, Legal & General, offers a fairly simple one to use, in comparison to others I’ve seen. Assuming that I retire at age of 60 and I’m aiming for a moderate level of income, it reckons I will need £550,000 of pension savings to buy a guaranteed income for the rest of my life (also known as an annuity) of £15,190. This is also assuming that I take 25% of the pot as tax-free cash and will not expect the remaining to go up in value.
Alternatively, you can decide to continue investing your retirement pot with the hope of it increasing in value. But the fact that you need more than £500,000 in savings (taking into account the state pension) would come as a shock to most people.
