It’s a big week for retirement chat and this morning the Pensions and Lifetime Savings Association (PLSA) announced updates in their research as to what level of income is needed for a minimum, moderate and comfortable retirement.
They estimated that a single person needed £14,400 a year for a minimum income, £31,300 a year for a moderate income and £43,100 a year for a comfortable retirement.
Couples required a joint £22,400 at the minimum level, £43,100 at a moderate level, and £59,000 at a comfortable level.
Now this poses many questions.
Is this research just an ad for the pensions industry? The answer is absolutely. Are these figures higher than expected? A big yes from me. And is this even applicable in NI? Yes, but no, but yes.
And let me explain
Does this feel like a big advert for pensions suppliers trying to argue people need to put more into their pensions? It’s exactly that!
But it does serve as a reminder that a lot of people right across the UK are not putting enough away for their retirement. And I don’t care whether you have your money in your pension, an ISA, property or another business. Having enough when you need it is the key.
And that brings me to my next point. Are these figures higher than expected? Well, that’s entirely subjective and the research is a load of crap because every one of us and our families have unique circumstances. Yes, there will be commonalities in spending, but you spend your money on the things you value. I spend my money differently. That’s a fact. So some arbitrary levels of minimum, moderate and comfortable lifestyles are completely subjective to you. I had a friend return from Africa just last week. They commented that many people they met, those with little or nothing by way of retirement assets are incredibly happy. We’re the miserable ones.
Let that sink in for a second.
Our lifestyles are of course limited by our budget and this is an important point. Because if you save and invest too little, you’ll be taking a drastic pay cut in retirement. Again, that’s not subjective. If you’re spending £40,000 a year today and you don’t put enough away to achieve this level later on, you’ll be living on less.
And just yesterday I did a little poll on my Instagram to ask the question about saving. Not even investing. But over 60% of those who answered, either save nothing or less than £500 per month. And of course, this matches what we already know. Right now there’s often little left at the end of the month, not to mention money for saving.
To give you an idea, the majority of my followers there and viewers here are late 30s or early 40s. And most of them one day want to retire. Not early, just retire and hopefully with enough.
Let’s say a joint couple want to retire at 65. They’re currently 38 and have a good 27 years to save and invest for their retirement. Currently, their household budget for their version of a “comfortable” lifestyle is £40,000. And they expect to maintain this in retirement.
Considering the 4% rule in withdrawal. Which I’m happy with in this video for a normal aged retiree, but check out my other videos on why I wouldn’t suggest this for an early retiree, they would need £1,000,000 saved and invested at retirement age.
Now if they have invested wisely and achieved an 8% return over that timeframe, they’d jointly need to contribute £450 a month to achieve a future investment value of £1,034,990.80
Things look better if they’ve amassed a small pension sum already. Let’s say they’ve 30,000 already invested. Then combined, each month they’d need to save and invest £650 to achieve over £1m.
Now the assumption is that they are getting an 8% interest rate on average throughout the rest of their career. Many workplace pensions and investments have not achieved this level and many may not continue to do so over the long term.
Let’s say they only get a 5% return, then using the first example starting from nothing, they’d need £1,500 a month invested for the next 27 years.
No one knows what the future holds, and saving/investing a little bit more each month protects you from the unknown.
If you’re focused on retirement, the amount you save and invest is just one part of the equation. The return you get is another and the final part is how long you invest it for.
The thing is, saving and investing start slowly. Then gets faster and things ramp up over time. The compounding of your investments works best over the longest timeline. But the acute focus on your money also grows as you invest.
You see it working for you and you want to put more money in. Saving is no longer boring and you find ways to bring your household budget down to invest more. By doing that, you end up needing less also.
Starting now in and around the age of 40, small changes to your budget and putting money away regularly for your retirement will add up.
And if you want flexibility over your money, then use a Stocks & Shares ISA. As an individual, you can invest up to £20,000 and as a couple, it’s double that.
So let’s go back to the 3 elements of retirement planning and decide what steps you need to take today.
How much you save – set a budget for your household and understand how much you need for retirement. The same budget can be used to determine how much you can save each month.
Your investment returns – most of you will be saving and investing in your workplace pension. You can no longer be a passenger in your finances. Understand how your money is invested and check you are happy with the results. If not, you might want to look outside your workplace pension and into an alternative such as a rental property or a Stocks and Shares ISA with a better range of investments or lower fees.
If you aren’t sure how to invest your money, check out my free investing class webinar which should be linked on the screen now. It covers everything you need to know and a whole lot more. And do let me know in the comments if you want me to hold another one.
Finally, we need time – There’ll never be a better time than now to invest. Will it be perfect. No! but getting started is key and letting time in the market help your wealth grow.
Look, a comfortable retirement is in the reach of most people. I fully believe that. Will it be easy? Probably not. Will you need to make changes? Most likely. But I’d argue that a lot of you are living in the moment and lived to your means for long enough.
Now is the time to pause and think about your future. Taking some of your spending and redirecting it into investments is the start.
Hit a thumbs up if you’ve enjoyed this video and leave a comment if you have any questions. See you next time.
