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.