Saving £824 a month for retirement is the stuff of fantasy
A new calculation of how much we need to be saving to enjoy the pension industry's recommended level of retirement income is not only unrealistic, but also unnecessarily high.
The average 30-year-old person wanting to enjoy a good retirement at the age of 65 needs to save at least £824 a month until they retire. That’s the mind-boggling new statistic from the deVere Group.
To put that in context, based on the average salary of £26,500 that leaves just £1,384 a month, before tax, to pay for housing, food, heating, lighting, transport, clothing and all of life’s other essential bills.
The average UK rent is currently £811 a month, according to HomeLet, so you can see how the pension saving might be something of a stretch. That’s particularly the case if the person is also trying to save for a deposit to buy a home.
The magic number here is 75 – as in 75%. That’s the percentage of your pre-retirement income the pension industry suggests you'll need as an income in retirement. But that’s the pension industry.
What will this turn into in retirement?
So what will that £824 a month turn into? After 35 years of saving, you'll have a pension pot of £433,098.65, according to the Hargreaves Lansdown pension calculator.
Now that seems to me to be a lot of money, particularly if you have paid off your mortgage already.
Currently the average weekly spend of people over 65 is £295, according to the Office of National Statistics (ONS). So if you were able to withdraw cash from your retirement pot without restriction, you could happily draw cash from your pot at that rate for 28 years before the money ran out. And that assumes your retirement pot doesn't grow at all during your old age.
Alternatively, you could buy an annuity which would give you a guaranteed income until you died. At current rates, you could get an annuity of at least £24,000 a year, or £461 a week.
Again, that's a fairly high income if you've paid off your mortgage and have no housing costs.
Other factors to consider
So you really don't need to save as much as £824 a month especially when you consider the following points.
Our examples have looked at income from the perspective of one person but spending from the perspective of one household. However, a household usually contains more than one person. In fact, the average 65+ household contains 1.6 people currently, according to the ONS.
So there are likely to be two sources of retirement income. For example, if two people put away £200 a month from the age of 30 until 65, that would equate to a pension pot of £210,000.
What's more, don't forget your home which you may own outright. If you downsized and pocketed £50,000, that could boost your annual income by close to £3,000 a year.
Most important of all, you needn't be the only person contributing to your pension. Many employers are legally obliged to contribute to your pension pot if you're also prepared to contribute. All employers will be under that obligation by 2018.
On the flipside, there are other costs that may crop up, for example care, helping out grandchildren and other family members. And I would also say that you can't rely on the State Pension or other Government benefits. Who knows what the Government will be prepared to pay come 2048?
Don't get me wrong – you need to save something for your retirement if you want to avoid carrying on working, or gambling on being helped by the state. The sooner you start, the better, even if it's only a small amount. And, of course, a pension isn't the only vehicle you could choose. We look at one alternative in Pensions vs ISAs: how to save for retirement.
But I hope this has made you slightly more positive about the future and debunked that £824 a month figure we started with.
*We have assumed charges of 1% a year, inflation of 2.5% compounded and real investment growth of 5% a year.
More on pensions and retirement
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New £144 State Pension: all you need to know
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There are lots of public sector pension bashers out there, some of whom have contributed to this discussion. It's very easy to point fingers and score points against such targets as public sector workers, especially when times are hard, but maybe a bit more research needs to be carried out before these people carry on their claims that it is they who are funding the retirement payments of public sector workers. Perhaps this will help to set the record straight. As a retired teacher, for each year I paid into the Teachers Pension Scheme (TPS) I now receive 1/80 of my average teaching salary calculated from the best three of the last ten years I worked (it's a bit complicated but that's how they arrive at how much we're paid). In my case I paid into the scheme for 25 years so I get 25/80 of this amount. In common with other public sector workers my pension used to be index linked to the RPI until the government decided to save money by cutting my pension by about £35,000 over its lifetime. It's now linked to the CPI instead. Don't get me wrong; I'm not complaining about my pension ~ in fact I even felt quite uncomfortable for the first few payments at being 'given' money that I hadn't actually had to go out to work for. This feeling worsened when the public sector pension scheme bashers accused me of receiving an inflated pension for which they were paying. I therefore decided to investigate and as a result realised there was no need for me to feel guilty. I'm not too sure about the history of other public sector pensions but I assume they aren't too dissimilar to the TPS, which was set up in 1923. You may be interested to know that, since its inception there has been a shortfall of £46.4 billion. No.....that's not how much has been overpaid in teachers' pensions but rather the other way round. £46.4 billion less has been paid out by the TPS than has been paid in by teachers.That's an average of over £51.5 million per year - almost £1 million per week - which has been paid in by teachers but not paid out in teachers' pensions. "I probably have to pay as much into public sector pensions as I'm able to afford for my own." I rather think that's unlikely Russbiker. Perhaps it's even the other way round.
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@hobbyhorse: This is an ongoing problem with the Love Money site. I did bring it to their attention some time ago but nothing was done about it. You will be able to see all of the comments the following day. r.
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If the state pension scheme had been set up properly in the first place, we would all have our own pension accounts and would not be a total drain on government resources. That goes for government and local government employees as well. The most that the government would have contributed would have been the tax relief and payments for the disabled / temporarily unemployed. As things are now, the whole state pension scheme is unfunded and is becoming an increasing burden on the employed. An opportunity to correct the state of affairs was presented by the discovery of North Sea oil and gas in the 60s but greedy governments used the cash for other things. In fact, the Beveridge report expected individual pension accounts to be set up but the government of the day (and all successive governments) found that the regular income generated by our contributions was too much of a temptation to resist; and so that state of affairs has continued until the present. It cannot go on because it cannot be afforded. Sooner or later, some government will have to grasp the mettle and deal with this problem. r.
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31 July 2013