Are you saving enough for retirement? I bet you think you are not. If you are anything like the rest of us, even the thought probably makes you feel slightly panicked. This is exactly how the industry would like you to feel.
With final-salary pension schemes shutting, annuity rates near record lows, and millions without private pension provision, the nation’s fund managers have plenty of ammunition when it comes to pushing their savings schemes (just type “UK pensions disaster” into Google to get a flavour of the debate).
This feeling is not helped by what a letter in The Times this week called the “utter disgrace” of TV shows following old men being forced to sell “sentimental family possessions” to pay for dental treatment.
But what if things aren’t quite as bad as they seem? A recent report from the Institute for Fiscal Studies carried the shocking headline that “up to one in five” are “facing large income falls on retirement”. But this covers up some rather good news in the rest of the report.
Look at only actual pension income (state and private), and around half of those aged between 50 and state retirement age are on track to retire on an income of 80% or more of their current income. Add in non-pension income, and that rises to 58%.
Add in half of housing wealth (on the basis that the retired often downsize) as well as expected inheritances, and you can get the number up to 78%, with just 12% likely to have an income less than two-thirds of their current income.
As Chris Dillow rightly notes on Investorschronicle.co.uk, this isn’t as great as it sounds – it partly reflects just how low many people’s incomes are in their working lives. But it is pretty good news.
The key point is that you don’t need anything like your working income in retirement. Look at what you spend every month. Remove your mortgage payments, commuting costs, pension contributions, the cost of lunch, your dry cleaning bill and the amount you pay for things you could do yourself but don’t have time to do well (from manicures to mowing the lawn to draining the radiators). Odds are you have just found you can live happily on 50% of your current income – maybe less.
That’s especially so if you live as a couple with only one earning partner: hit state retirement age, and you’ll get two state pensions totalling over £11,000 a year (at today’s rates) assuming you are both up-to-date on your national insurance.
Look at it like this, says Dillow, and while some people clearly are saving far too little, others might be saving too much. Financial life is all about finding a balance between consumption now and consumption later. You don’t want to find that you sacrifice too much now when you won’t need the money later.