Your Pension: Expectation vs Reality

Planning for your retirement can be exciting, as you think about the financial and personal goals you can achieve. However, it can also be daunting, especially as most of us underestimate the size of the pension pot we need in order to retire comfortably.

In this article, we’ll explore the difference between the savings and income you’d expect to have in retirement, compared to the reality of the situation.

What are the expectations for comfortable retirement?

According to research by the Pensions and Lifetime Savings Association (PLSA) and the University of Loughborough, carried out in October 2019, a couple would need £47,000 a year for a comfortable retirement, whereas a single individual requires £33,000.

The research included discussions with groups of members of the public, and considered the goods, services and income needed by a range of households,for retired singles and couples.

This research defined a comfortable retirement as:

 “a lifestyle that allows you to be more spontaneous with your money. You could have a subscription to a streaming service, regular beauty treatments and two foreign holidays a year.”

However, a recent survey conducted by wealth management firm Saltus, discovered that high-net worth individuals (HNWIs) believe that they need a much higher level of income in retirement.

The Wealth Index, launched in October 2021, gathered the results of 1,000 respondents— all of which had investable assets of £250,000 or more. The survey covered different areas of discussion, including the UK economy, personal finances and lifestyle.

Almost two-thirds (64%) of those surveyed believed that they would need £50,000 a year to achieve their ideal retirement. In fact, the general consensus of HNWIs was that £53,000 a year is required, although one in seven (13%) said they would need at least £80,000 a year.

In terms of the pension savings needed to comfortably retire, the study revealed that HNWIs think they need roughly £730,000. However, this is considerably lower than the reality, and underestimates how big the pension pot needs to be to achieve the retirement that many aspire to.

We can therefore conclude that each individual is different, as is their view on what a comfortable retirement looks like. The best way to determine your spending and income needed in retirement, is to consult with an expert financial adviser to make use of their financial planning services. This can ensure that you have analysed your current and anticipated expenditure, as well as how much you need to invest for retirement, accounting for a range of factors.

What is the reality of a comfortable retirement?

If £730,000 is deemed an underestimate for some, how much is needed to retire comfortably? For this, experts tend to use the 4% rule — determined by financial planner, William Bengen. He found that regardless of when someone retires (over a 50-year period), with annual withdrawals of 4%, adjusted for inflation, the pot would always last 30 years.

The full state pension is also taken into consideration. When you reach state retirement age, you’ll receive £9,339.20 a year — if you are eligible and have made 35 years of national insurance contributions. For the foreseeable future, this will be determined by either the inflation rate or 2.5%, as the triple lock is to be suspended for 2022-2023.

Using both the 4% rule and the expected state pension, we can calculate a rough estimate of the pension savings needed. If an individual requires an income of £80,000 — as some HNWIs have expressed — then the shortfall would equal £70,660.80. Dividing this number by 4% (as per Bengen’s rule) gives us a total of £1,766,520 needed in the pension pot.

If you’re not eligible for full state pension, you would need to adjust the shortfall accordingly. Likewise, calculations would be adjusted if you’re in your expected to retire as a couple, or earlier than the state retirement age.

There are also some issues with Bengen’s approach, such as the consistency of the withdrawals and length of time exceeding 30 years. Therefore, it is always best to consult with a professional when planning for your retirement.

With an expert financial plan in place, you can rest assured that the expectations for your retirement match the reality of this stage in your life.

Disclaimer: Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested.

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