Welcome to your future. You’re in your 90s, which you probably never really expected. And you’re broke. Which you also didn’t expect.
At least that’s what the World Economic Forum is predicting for most of us after a huge study across six nations found women, in particular, will bear the brunt of a severe cash shortfall against a backdrop of increasing longevity.
As government and employer-sponsored retirement plans around the world come under strain, individuals have found themselves increasingly responsible for their retirement savings.
But those savings aren’t accelerating fast enough to make up for the deterioration of traditional retirement plans, the heavyweight not-for-profit group warned.
Most male retirees can expect to live past their savings by nearly a decade. Women can expect to go even longer, as they will likely live two more years without savings to rely on due to their longer average lifespans.
In fact, the Office for National Statistics here in the UK estimates that a woman already aged 65 has a 7.4 per cent chance of living to 100.
Almost one in five women aged 25 today will reach their centenary year. A 25-year-old man has a 14 per cent chance of living to the same ripe old age.
Essentially, Britain’s younger generations should be working on the assumption that their retirement savings need to last them 35 years after they stop work.
But if you’re sitting back at this point in the knowledge that the contributions into your workplace pension have just gone up so you probably have nothing to worry about, don’t relax. Particularly if you’re only paying in the minimum.
A 25-year-old earning £30,000 and saving the minimum amount would end up with a pot of around £200,000 in today’s prices by age 65 – that would buy a guaranteed, inflation-protected income worth about £6,500 right now.
If you combine that with the state pension you’ll be living on around £15,000 a year according to figures obtained from the Money Advice Service annuity calculator.
So how much do you need to save to see you through to 100? If you’re after, say £20,000 which, once the state pension is added on top will take you to the average UK salary, the figure is at least £447,000.
And now that pension freedoms have given us easier and cheaper access to our retirement savings earlier, the pressure really is on to make sure the cash can still last if we dip into our retirement funds in advance.
“The extent to which a withdrawal strategy is sustainable or not will depend on a number of things including overall investment returns, the timing of those returns and inflation,” notes Tom Selby, senior analyst at AJ Bell.
“The best way to ensure a comfortable retirement is to start saving early and often. To save the £447,000 required for an average salary in retirement from age 65 to 100, a 25-year-old would need to save £235 a month.
“Delaying by 10 years to start saving at age 35 sees the monthly saving figure almost double to £428 and if you wait until age 45 it is a whopping £859 a month.”
If these amounts sound unrealistic it’s still worth saving what you can, making the most of the bonus of pension tax relief and the matched employer contribution through automatic enrolment.
“You also need to think carefully about the investment risk you want to take,” Selby adds.
“Younger investors, in particular, should be able to take more risk than their older counterparts, giving their fund the chance to grow over time. In addition, high charges can have a seriously detrimental impact on your retirement over the long-term, so shopping around is absolutely critical.
“If people get this bit right and build a decent pension pot in the first place, it becomes much easier to make that pot last – even over a lengthy retirement.”
Five ways to make sure you don’t run out of cash in old age
1 Set a reasonable income target – 4 per cent of your initial fund value, increasing in line with inflation, is a decent starting point for a healthy 65-year-old. You might be able to take more if you retire later and less if you retire earlier.
2 Make a budget and stick to it so you stick to your spending limits during retirement.
3 Shop around the market and keep costs as low as possible so your fund isn’t eaten up by unnecessary charges.
4 Get all your pensions in one place if you can (but be careful not to lose any valuable guarantees in the process). Savers often lose track of pensions during their lifetime, which could mean an income shortfall in retirement.
5 Review your funds, provider and withdrawal strategy at least once a year. If your funds have performed well you might be able to increase your withdrawals. Equally, if they’ve struggled you might need to think about cutting back on your income.
Source: AJ Bell
