Many people like to think they're on track for a comfortable retirement, but in reality, they may be in for an unwelcome surprise, with research from Saga Investment Services finding that the average over-50 needs to double the amount they think they'll need…
The research highlights just how much savers are misjudging their pension needs, with there being a vast gap between expectations and reality. The survey asked over-50s to estimate what kind of annual income they'd need to cover different retirement lifestyles, and how big a savings pot they'd need to deliver the income they wanted.
The answers were telling. The respondents said that, to cover the essentials, they'd need an average annual income in retirement of £15,200, a sum which they thought could be generated from an average pension pot of £143,830. However, according to Saga's figures, a pension pot of this size would only generate £7,940 in guaranteed annual income for life (through an annuity) for a healthy 65-year old – a shortfall of almost 50%.
Essentially, this means that they'd need double their pension pot in order to meet their retirement income target, but given that they're already approaching that stage of life, this could be a difficult feat to achieve. It could be a particularly difficult situation for women, who underestimate their pension requirements even more: men underestimated what they needed in their pension by 41%, women by 66%.
Looking at the figures in terms of drawdown, as opposed to guaranteed income, paints an even more worrying picture. Based on the estimated pension pot size of £143,830, Saga calculated that keeping it in drawdown with the average "essential income" drawn out annually (and assuming that the fund grows by 5% per annum, net of fees and charges) would mean that the saver would actually run out of money after just 13 years.
Comfortable (and expensive) living
This is just based on essential spending, too – in order to secure what was deemed as a "comfortable lifestyle" an annual income of £21,630 was felt to be necessary, but once again, the actual pension needed to generate that income was double the estimates of the over-50s surveyed.
The respondents felt that around £194,000 would be sufficient to achieve this kind of income, but this would only generate an annual guaranteed income of £10,170, again leaving a shortfall of around 50%. Not only that, but in the drawdown scenario, the fund would be exhausted after 12 years.
And what about those seeking a luxurious lifestyle? Yet again it's a similar story: those who wanted to enjoy a truly indulgent retirement with frequent holidays, expensive social activities and home refurbishments thought they'd need an annual income of £46,640, and estimated that a pot of £419,520 would be sufficient. In fact, that kind of pension would only generate £22,720 in guaranteed income, leaving a 51% shortfall, while drawing down the pot would see a saver running out of money after just eight years.
"It's worrying that Britain's over-50s are misjudging the level of savings they need to have a decent and comfortable retirement income," said Nici Audhlam-Gardiner, managing director of Saga Investment Services. "Our research found that 80% of people simply couldn't begin to make an estimate of how much they need to save to get the lifestyle they want, with the result that they are severely low-balling their pension and savings plans.
"It's vital that people take into consideration all of the financial possibilities, sources of income and investment options to hit their retirement income goals."
Don't be disappointed
The key to ensuring you're on track to achieving your retirement goals is to plan ahead. Start saving as much as possible from as early as you can, ideally by joining your workplace pension scheme, and make sure you understand your future options by finding out more about the pension freedoms.
You may want to consider additional savings vehicles, too, such as an ISA for long-term tax-free saving, and don't be afraid to seek advice so you can be confident you're on the right path. That way, you'll hopefully be one step closer to saving enough for the retirement you want.
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