Across the world, there’s a misalignment between retirement goals and the reality most of us expect to face, according to research from Schroders.
For example, the average target retirement age is 60, however many people expect that they will not actually be able to stop working until three years later. Meanwhile, people who are still saving for retirement are putting away an average of 11.4% of their annual savings but feel that a minimum of 13.7% is needed to ensure that their retirement fund can support them in later life.
Learning from the mistakes of others
Globally, 66% of retired people regret not saving more, and 22% of those say that they should have put “a lot more” aside during their working years.
Unfortunately, hindsight doesn’t pay the bills, so, for those still working toward a comfortable retirement, it is time to review your savings and make sure that you will not be in a similar situation when you finish working.
It can be easy to assume that your current plan is enough, and that you will be okay. Unfortunately, assuming simply isn’t good enough. You need to actively check that you are putting enough aside for the future and that you are on track to meet your retirement goals.
One of the main reasons that people tend to assume that they are doing enough is the recent automatic enrolment into workplace pension. A popular opinion seems to be that making the minimum contributions means that you will have a sizeable amount in the pot when you choose to finish work. Unfortunately, that is not true.
How much will you need?
According to research from Aegon, an average earner will need a pension fund of £301,500 to continue enjoying their pre-retirement lifestyle. That figure will not be true for everyone. Studies show that to maintain your current lifestyle, you need to aim for a retirement income of at least two thirds of your current earnings. But, the lower your current salary, the higher proportion you will need to remain financially viable.
Unfortunately, it can be easy to underestimate how much you will need to secure that monthly income.
Your State Pension is likely to form the foundation of your retirement income. To receive the full annual entitlement, you will need to have 35 qualifying years on your National Insurance record. These are years during which you have paid National Insurance through employment, voluntary contributions or National Insurance Credits which are included with some state benefits.
Once you know how much you are likely to receive from your State Pension, you can begin to work out the shortfall between that figure and the amount you really need to support yourself.
To calculate how much is needed, you should consider both your life expectancy and any unexpected or additional costs you could face in later life, such as health care, accommodation and an emergency fund.
Using the right tools
It’s possible to get projections from pension providers and use online tools to see what you might get, however, as financial planners, we can do that for you. We can also do things that automated forms cannot, such as factoring in Pension Freedoms rules and displaying options to show you what your life may look like if you made different decisions. As well as this, we can help you to make sense of potential threats such as poor performance or overcharging.
Facing the shortfall
It is estimated that 12 million people in the UK are not saving enough for retirement, so if you are currently unlikely to reach your goals using your current methods, you are not alone. If you are falling short of your target retirement income, you have three options:
- Accept the shortfall and live a more reserved lifestyle: It’s not ideal, but if you don’t make any changes now, it will be your reality when you stop working.
- Save more while working: If you aren’t already, make sure that you have joined your Workplace Pension and are making sufficient contributions to meet your retirement needs. By choosing not to take part in a Workplace Pension, you are effectively giving up free money in the form of employer contributions and tax relief.Increasing your Workplace Pension contributions or topping up your own personal savings will mean that you have more money available when you retire. You may have to make some sacrifices in the short term, but it will be worth it for the peace of mind that comes with a financially stable retirement.
- Delay your retirement age: By working for longer, you can do two things. First, you push your State Pension back, increasing your income for each year you do so. Second, by working longer, you generate more income for yourself and can continue paying into a pension for longer, which will mean that you have a larger retirement fund when you stop working.
The value of advice
According to research from Unbiased, those who seek financial advice when planning for retirement find themselves contributing an additional £98 each month toward their pension, which equates to a £3,654 boost in annual retirement income.
Financial advice can help you to identify your goals, as well as helping you to find strategies and methods to achieve them. To talk about your retirement planning in more detail, get in touch with us on 0800 612 8099.