Retirement is a pretty big deal – both financially and emotionally. A good retirement plan can make the task significantly less daunting. Contrary to popular belief, retirement isn’t actually as expensive as you’d think. Yes, you won’t be receiving a regular salary but think of all the costs you’re saving! You won’t need to pay for the commute to work or make pension contributions. And most people are done raising their kids by the time they hit retirement age.
Most experts generally suggest that anywhere between 50 – 70% of the salary that you’re earning around the time you retire is a good ballpark figure. So, let’s suppose you’ve been earning £10,000 then you’d need around £6000 to maintain your standard of living. This amount should allow you to live a comfortable life after retirement.
But, on the other hand, this may not always be the best way to estimate. Believe it or not, there’s no hard and fast rule to figure out the exact amount of income! Everyone has a different life and there’s a lot of variables to factor in. But a good place to start is to roughly estimate the amount that you think you’re going to end up spending.
THE LIFESTYLE YOU’LL LEAD
Before you can even start to estimate how much money you’re going to spend in your later years you’ll need to figure out what kind of lifestyle you plan on leading. The Department for Work and Pension states that these lifestyles can be grouped into three main categories:
- Basic – this lifestyle covers all your bare essentials
- Comfortable – provides for a way of life that allows a bit more room for expenditure, perhaps the occasional domestic holiday or expenditure
- Wealthy – a lifestyle with lavish expenditure such as home renovations, car upgrades every few years or foreign vacations
HOW TO FIGURE OUT YOUR EXPENSES?
Once retired the money you spend tends to change, and so do the things you spend them on. Typically, the things that you stop spending on or spend less on are:
- Mortgage payments
- Children’s expenditure
- Transportation costs
At the same time your expenditure for the following things tends to increase:
- Medical and healthcare costs
- Insurance
- Socialising, holidays etc.
SINGLE HOUSEHOLD EXPENDITURE VARIED AS FOLLOW:
- £13,000 for a basic lifestyle
- £19,000 for a comfortable lifestyle
- £31,000 for a wealthy lifestyle
TWO-PERSON HOUSEHOLD EXPENDITURE VARIED AS FOLLOW:
- £18,000 for a basic lifestyle
- £26,000 for a comfortable lifestyle
- £41,000 for a wealthy lifestyle
WHAT EXACTLY IS A PENSION POT?
The phrase “pension pot” has some degree of flexibility, but for the main part, it’s a phrase coined to describe the total amount of pension savings that either you or your employer have set aside for your retirement. You’re likely to hear it used in contexts such as “I have £400,000 in my pension pot.” But it can also be used to describe the different individual setups people have made so it’s not entirely unlikely for you to also hear it used in a sentence like “I have £200,000 in one pension pot, £40,000 in the other and £100,000 in one more.”
THE AVERAGE PENSION POT IN THE UNITED KINGDOM
So now that we’ve cleared up what exactly a pension pot is, the next question that arises is how much are other people putting into their pension pot?
The average figure according to life insurance provider Aegon is £50,000. But finder.com’s 2000-person survey shows that the average pension pot in the UK is £42,651. And what’s more is that non-retirees tend to have around £33,809 saved for retirement.
7000 retirees were surveyed by consumer organisation Which? and the results were as follow:
- A basic lifestyle has an estimated £47,325 pension pot annuity with a £28,810 pension pot drawdown
- A comfortable lifestyle has an estimated £265,420 pension pot annuity with a £154,700 pension pot drawdown
- And a luxurious or wealthy lifestyle has an estimated £757,000 pension pot annuity with a £442,020 pension pot drawdown.
Generally, the sooner you start putting money towards your pension, the more likely you are to have a comfortable pension. For example, research done by Which? estimates that a couple that starts saving at the age of 20 would only have to contribute £194 a month in order to have enough to maintain a comfortable lifestyle after retirement. Now on the other hand, if you have a couple that decides to save money at the age of 40, they will have to put aside £253 per month.
And while knowing what the average pension pot where you live is may be helpful in some cases, it’s not necessarily the figure that you’ll require. In fact, in some cases it might be entirely irrelevant. Everyone has different financial obligations, personal needs and more. You’ll also need to take your savings and investments into account.
PENSION ANNUITY AND PENSION DRAWDOWN
To put it simply, a pension pot drawdown basically means that you’ll be able to take or withdraw your cash flexibly, you can take out as little or as much money as you require, it’s completely up to your control! This applies to most contribution schemes.
However, the main drawback of this method is that if you withdraw too much money, you could potentially run out of money, think of it as emptying out your back account. The responsibility lies on you to make sure it lasts for the rest of your life.
On the other hand, an annuity is basically the opposite, you hand over your pension pot to an insurance company of your choice and you receive a consistent income for the rest of your life – yes, even if you live to be a 100 and more! And the income you receive could change due to inflation. So, there’s a lot of security and consistency with an annuity. There’s also an option to provide for your partner by opting for a joint annuity in case one of you has an untimely death, so if you have an early death, they will continue to get a portion of the payments. On top of that, there’s also options for capital protection.
However, the consequence of an annuity is that the amount of money you receive will be quite low. And you also can’t change your mind after opting for an annuity so it’s best to explore the options available to you before making a final decision.
WHICH IS THE BETTER OPTION FOR YOU – ANNUITY OR DRAWDOWN?
It really depends on your circumstances, if you’ve got enough income to meet your basic needs (food, shelter, health) then a drawdown pension might be more suitable for you. It’ll allow you to have extra cash when you require, for example like leisurely activities like travelling and vacations.
But if you fear that you might not have enough to consistently meet your basic needs then an annuity will give you the peace of mind that you’ll always have enough to meet your essential requirements.
HOW MUCH DOES YOUR PENSION POT REQUIRE?
A commonly cited method or rule of thumb is that you’re going to need about 25 times the amount of money that you spend annually. And if we assume that you spend say £40,000 a year, then your pension pot should have at least £800,000 to £850,000.
However, you can’t forget to consider in factors such as any additional income you’ll receive after retirement, perhaps through rent, a State Pension, investments, or something entirely different. That’s why it’s recommended for you to deduct that amount from any income you receive.
Another good way to start calculating how much you need is to look at your current financial situation and move accordingly. If you have 25% of your income left over at the end of each month, then your expenses are on average 75% of your total income.
Now you need to make a rough outline of the sort of things you spend your money on, once you’ve got that figured out it’s a simple matter of taking a look at your life plan and deducing how things are going to change in the future once you’ve retired.
- Are you planning on travelling a lot once you retire? Going on vacations and holidays?
- Do you or your loved ones have any health or medical issues that could be a problem in the future? Is your health insurance adequate enough to cover these things?
- Is your daily or regular commute going to be the same or less? Will you be spending less on car maintenance and car fuel?
- How often – if at all – do you plan on buying new cars? And which models of car would they be?
- Will you be financially supporting anyone beside yourself? If so to what extent?
- Do you plan on renovating your home or upgrading your living situation? Will this reduce or increase your cost of house maintenance?
These are all questions you’re going to have to ask yourself in order to get a good estimate of how much you need to save. A helpful to prevent your expected expenditures from getting muddled up or confusing is to make a retirement timeline. So, by corresponding expenses you think you’ll have with respected time periods in your later years you’re able to stay on top of things!
At the same time, it’s also important to leave a little extra room for any unpredictable or unexpected costly situations – just to be on the safe side.
So now you’ve got a rough idea of how much you’re going to need, and it may seem like an awful lot of money so – where’s it going to come from?
WHERE ARE YOU GOING TO GET YOUR RETIREMENT INCOME FROM?
The short version is that there’s two main sources: income and capital.
But let’s also dive into the slightly more detailed and longer version.
INCOME
Income is the amount of money that you receive in your bank account on a monthly basis. This includes but isn’t limited to:
- Savings
- State Pensions
- And if you’ve got tenants then rent
An important for you to keep in mind is whether you’ll receive all sources of income consistently or not. Perhaps you’ll retire at 60 but not be eligible to receive your State Pension till a few years after that.
CAPITAL
Capital includes things like your personal savings, investments, or pension. You can access it on a monthly or yearly basis or however you desire.
WHAT NEXT?
So now that you’ve got an idea of the funds you have and require, it’s helpful to make a retirement income plan. When stripped down to its basics your retirement income plan is just the sum of your income and capital.
Your retirement funds are a pretty significant amount of cash, in order to save up for your pension, it’s very important to stay on top of your finances and to be consistent with your savings.
