I’ve been doing some research lately on the subject of pensions and what proportion of the working population are not investing enough for their retirement.
And I don’t mind saying that I was shocked at what I discovered.
Not only are the results of my research shocking, but the number of people that are heading for a miserable retirement is growing at an alarming rate.
If you are like most people that don’t know how much income you will need in retirement; how big a pension pot you will need to generate such an income and you are basically in denial on the whole subject of pensions then you might want to look away now.
I strongly recommend that you don’t do that though.
Because if you keep reading instead, I’ll show you how you can work out your numbers and even better than that…what you can start doing now to ensure you have that happy retirement that you deserve.
My Shocking Discovery
A recent survey by JP Morgan Asset Management found that 47% of pre-retirees in the UK say that they are planning to rely on state benefits for their retirement income.
Six years earlier, the same survey found that 29% of working people were planning to do this, so in the space of only 6 years, this figure has grown by more than half.
In the same survey, 16% of people say they are relying on an expected inheritance from their relatives.
In other words, they are expecting the lifetime investments made by their relatives to help them out.
If we focus purely on self-employed men, we find that only 34% of them are saving in a pension, 20% used to save for a pension but have recently stopped bothering and a whopping 46% of self-employed men have never saved for a pension.
If we focus on private sector employees, only 33% are saving for a pension.
The only exception to these shocking statistics, which didn’t surprise me at all, is that 83% of public sector employees are saving for a pension.
This one, won’t surprise you either when I tell you that 95% of those public sector pension schemes are still final salary (defined benefit) schemes whereas only 29% of private sector pension schemes are still final salary based.
So if you work in the public sector, you’ve probably got nothing to worry about yet.
But for those of you that are working in the private sector or self-employed, your day of reckoning is coming.
How Much Money Will I Get In Retirement?
For those of you planning to rely on the state pension, you may be surprised to know that this is currently only £5,728 per year.
If this doesn’t sound much – it isn’t – and in my view, this may well disappear in the next 20-30 years or earlier because the UK Government are having great difficulties funding it already and that’s without the significant increase in the ageing population that is on its way.
If we compare the state pension against the National Minimum Wage in the UK, which is currently £12,115, we notice that the state pension is less than half the minimum wage.
How would you like to manage in your old age on less than half the minimum wage?
It goes without saying that if you want to avoid poverty in your retirement, you need a way of generating extra income for those years in your life when you are no longer working.
Or else you’ll just have to keep working when you don’t want to.
Indeed, 32% of people are already resigned to this, expecting to continue working part-time for as long as they are healthy enough to do so.
How Much Money Will I Need For Retirement?
According to the National Association Of Pension Funds, the average personal pension pot at retirement is only £28,000.
With a typical annuity rate of 5% or so, that will generate an additional retirement income, on top of the paltry state pension, of only £1,400.
Whoopee! The average pensioner will get an annual income equivalent to 59% of the minimum wage!
If you want to work out how much income you really need in retirement, I recommend you work out all your expenses to cover the things you think you’ll need, remembering that your lifestyle will be different.
So you won’t need all those work clothes, lunches out, travel costs commuting to work, school fees, home mortgage costs, etc. but you will expect to spend more on health and if you have plans to travel more, for example, then those holidays will need funding somehow.
If you’re too lazy to work all this out, then a rule of thumb is usually 40% to 60% of what you spend pre-retirement but this all depends on your age and income level of course.
So better to work it out properly if you can.
When you have your annual expenses number, just divide it by 0.05 (i.e. 5%) to arrive at your required pension pot size.
As an example, if you want a retirement income equivalent to today’s average income of £25,000, you will need 25,000/0.05 = £500,000 – half a million!
That’s a little bit more than the £25,000 pension pot that working people are currently retiring with!
Note that all of these calculations are at today’s economics because we have ignored inflation.
So all this assumes that your existing pension savings will grow at a rate of at least the rate of inflation.
Which is not the case if you have your savings in cash at the moment!
What You Can Do To Ensure A Happy Retirement
You may think that I’m going to suggest you invest more into your pension and start one if you don’t have one already?
Well…that would be a good start and I recommend that you get some proper advice from a qualified pension advisor when you do.
But I don’t recommend you put all your spare cash into a pension for reasons that I wrote about here.
Because there is a better way that you can invest and grow your ‘retirement fund’, even while you are in retirement drawing a pension income from your traditional pension fund!
Invest Some Of Your Spare Cash In Company Shares
Shares are much more flexible than pensions.
Indeed, most pensions consist of a large number of share investments – mostly in large blue-chip companies that you would know and recognise.
For a list of the advantages of shares compared to pensions, see here.
If you are new to shares you have probably not given them much thought before but these advantages make them worthy of investigation.
You don’t need vast pots of money and it doesn’t take a lot of time and energy to learn if you get yourself a bit of training and support.
YOU can start right now by reading my free e-book – “How To Invest In Shares“.
And of course, if you’d like to have a chat with me about it, then you can contact me here.