The press is chock-full of stories about our impending financial doom in retirement. I should know – I’ve written a fair few of them. Demographic timebomb … Equitable Life … mis-sellling … payouts slashed … work ’til you drop. You know the picture. But are we guilty of our own bit of mis-selling? Two reports out this week paint a picture of our retirement prospects that suggest that, with a nudge and push, most people should be able to enjoy a comfortable retirement.
Let’s say you are 40 years old and neither you, nor your partner, have saved a penny for your later years. Disaster looms, you think, because of the impossibly high sums you have to put aside when you are already struggling with the mortgage, rent, children, car loan and so on. But the truth is, a 40-year-old need put just £40 a week aside – or as little as £8 a working day. Or little more than three coffees from Pret.
The figures come from Which? in a report this week which looks at what retired people really spend, and how much you need to finance that. It surveyed 2,700 retired and semi-retired Which? members and found that, on average, retired couples spend £18,000 a year on life’s essentials – food, heating, transport etc – and £26,000 a year once the extras are included, such as holidays. For the better-off, spending on long-haul holidays, golf club membership and a new car every five years, the “luxury retirement” figure came in at £39,000 a year.
A separate survey by financial planner Tilney found a similar picture: it said newly retired households (aged 65-plus) spend £26,500 each year until they reach 75.
But how does saving £40 a week now come anywhere close to financing that sort of lifestyle?
First, don’t underestimate the value of the new state pension. It’s now £159.55 a week, so for a couple that’s £16,593 a year. Therefore they need around £10,000 a year more to fund a decent retirement. But we shouldn’t forget tax: a couple aiming for £26,000 a year need £26,750 gross, while the “luxury” £39,000 income needs to be £43,000 before tax.
The next step is to start saving now to build up enough money at retirement to bridge the gap between the state pension and the £26,750 needed. Which? says that for a couple of 40-year-olds, the sum needed is £338 a month. That sounds like a huge amount for any hard-pressed family, but look at it this way: £338 a month is £169 a month each, or just £39 per week.
That should be enough for a couple to build up a pot worth £210,000 by 67, which should be enough to draw down an income of £10,000 a year for the rest of their lives.
Tilney’s figures are, if anything, even better: it suggests you need only build savings worth £152,000 to bridge the gap between your state pension and an annual spend of £26,500 a year. That’s because it assumes your spending needs fall after your late 70s, as you are less likely to be jetting off on holidays or using the car so intensively.
Now there are huge caveats. A large number of people won’t receive the full state pension, and not only people who had career breaks. If you were contracted out at some point (and millions were), then you won’t have the full contributions record. And you can’t be sure about the purchasing value of the full state pension in 20 or 30 years. Future governments may let the state pension gently decline in value, and will almost certainly make you work until 70 before you get it. What’s more, investment returns may be lousy, and inflation could rise steeply.
Still, the figures should give hope to the early middle-aged who have saved nothing yet. But what I did not mention is the outlook for 50-year-olds who haven’t yet started saving for a pension. I daren’t reveal the figures … basically, if you’re 50 and pension-less, it’s back to the usual pension story: you’re all doomed.
guardian.co.uk © Guardian News & Media Limited 2010