Various socio-economic surveys confirm that most people start thinking of saving for retirement when they are in their fifties. Many retirement planning experts say this is far too late to guarantee a stress-free exit from working life. So, what kind of income and retirement pot does one need to build to retire comfortably?
It is disappointing that the local financial services industry does not publish enough research studies to help people plan for retirement. They focus on convincing people to buy one of their pension plans on which they can reap as much profit from ‘non-interest income products’ as possible. They fail to educate people on the number-crunching techniques they must master to plan for this critical phase in life.
The next best thing for those needing to think about and plan their retirement is to review the studies made in other countries. These studies often give a good insight into what elements they need to consider when determining how much money they need to save throughout their working lives.
Of course, financial planning for retirement is not an exact science. Life is unpredictable. For instance, it is common for people’s circumstances to change, with many becoming single before or during retirement. Many older adults are widowed, and others end up unexpectedly single due to divorce or separation.
The UK Pension and Lifetime Saving Association (PLSA) recently published a report that is a must-read for all generations of working people who aspire to retire comfortably.
The PLSA estimates that today, a single person in the UK (excluding London) needs €47,000 annual income to live comfortably, €34,000 for a moderate lifestyle, and €15,000 minimum to survive.
Couples enjoy some economies of scale as many of our living costs are fixed and do not vary much with household size. Running a car or owning a pet costs the same whether you are a couple or a single person. So, a couple’s income must hit €64,000 for a comfortable lifestyle, €47,000 for a moderate one, and €24,000 to survive. All these projected incomes must be net of tax and housing costs.
One needs to understand what to expect from these three retirement lifestyle options. A comfortable lifestyle for couples will include a €700 annual budget for house maintenance and €250 per week for food, including occasional eating out. It also includes provision for car maintenance, a two-week holiday in Europe, and about €1,800 for clothing and footwear.
In an era where instant gratification seems to be the primary objective of younger generations, it is crucial to understand that time does not wait for anyone
Those who aim for a moderate lifestyle retirement will budget €550 for home maintenance and €200 a week for food and occasional takeaway meals. Moderate lifestyle income projections also cover car maintenance, a two-week low-cost holiday in Europe, and €1,800 for clothing and footwear.
A basic survival lifestyle income caters for €110 annual home maintenance and €70 per week for food. However, no allowance is made for car maintenance, as people on this income are expected to use public transport with all the frustrating implications associated with it. Clothing costs must be kept within a €700 budget.
This number-crunching exercise can be mind-boggling for many. So a simpler method could be estimating the pension pot one needs to have on retirement. Of course, one has to revise these figures yearly as inflation can make original estimates meaningless over even a short time.
The PLSA study calculates single persons in their mid-20s today need a pension pot of almost €1 million to have a comfortable retirement when they retire. A couple of the same age must aim for €1.1 million for the same retirement lifestyle. The basic assumptions are that inflation will increase by two per cent each year, and their investments will see a five per cent return.
There are, of course, so many variables that can affect one’s retirement planning. Pressures on the public health system will always be intense. So having an emergency pot for private healthcare could mean avoiding long waits for non-critical lifestyle-enhancing surgeries in retirement.
Relying on the state pension will never be enough to guarantee a stress-free retirement. In an era where instant gratification seems to be the primary objective of younger generations, it is crucial to understand that time does not wait for anyone. Some will be lucky and inherit enough money from their parents to compensate for their insufficient attention to save for a rainy day in their youth.
For most younger adults, planning for the future to avoid a retirement riddled with financial distress is never too early.