Am I saving enough for retirement?
That’s a question anybody in the pension industry will be asked. Like, a lot. People just don’t know if they’re on track for a decent retirement.
I’m not that different, so decided to do a little work on this to set my own mind at ease. I’m not a financial adviser and am not pretending to be here. I’m not trying to decide how I take my money, or answer if it will last for my expected lifetime.
This is simply a post that explains how I try to answer my own question about whether I’m saving ‘enough’ for retirement.
There are a few ways to look at the problem.
- Aim for a set level of income, then figure out where that’s coming from.
- Try to save a set percentage of pay in pension contributions.
Aiming for a total percentage contribution that’s around half your age. 10% if you’re 20yrs old for example.
This means that you save more as you get older. This is generally what happens in practice because most of us have higher living costs on lower salaries in our younger years.
- Just save as much as possible and use guides like the PLSA’s Retirement Living Standards to assess whether that’s going to provide a decent standard of income in retirement.
I’ve generally aimed for the second approach but am curious about the first given how nervous I feel thinking about it.
Aiming for a set level of income
Initially, I need to decide what income I should aim for on retirement. That presents a few options to think about.
- The traditional method, aim for 2/3rds of your salary on retirement. I don't know what that figure will be at retirement for me, so let's aim for 2/3rds of my current salary.
I'm not going to disclose my actual salary, but let's assume it's £45k for the purposes of this exercise.
MoneyHelper takes a different approach and suggests a range based upon your current income; generally, the lower the income you’re on, the higher the proportion of that income is needed in retirement.
- Using the PLSA Retirement Living Standards as a guide of what a minimum, moderate and comfortable level of income look like, using today's standards. Deeper dive:
Using the 2/3rds guide
If I use the 2/3rds guide, I have a starting point at least. 2/3 x £45,000 is £30,000 – a ‘moderate’ standard of living, according to the PLSA.
Next, I need to multiply that figure by 20. Let's go with 20 because I may have heart failure if I look at a 30 times figure.
20 x £30,000 is £600,000.
I mean, good grief, that's scary enough.
Let's look at this logically. I'm unlikely to retire early voluntarily; I just can't afford it. So, I'm aiming to work until my state pension kicks in at age 67 and a bit (currently).
Calculate your state pension entitlement
I've had estimates of my state pension and have a good NI history. I'm going to assume I’ll be entitled to a full new state pension which currently sits at just over £9,600 a year, which I’ll knock off the total income target.
Include any existing pensions
I've two small Defined Benefit pensions that kick in at 65. I don't know their current value (the original value plus some limited inflation-proofing), so I'll underestimate and use the original values I was advised of when I left employment; totalling £4K a year.
Now we're seeing that my DC pot needs to fund an annual income of £16,400 a year at 67.
That means the fund value I'm aiming to have at 67 should be around £328,000.
|Pension Income target
|State pension for 20yrs
DB pensions for 20yrs
|Pension fund target
Sounds a bit more achievable, yes?
So how do I achieve it?
In my last post, I mentioned that I don't think I have my own pension situation sorted, even though I've worked in the industry for over 20 years. In addition to the small amount of DB pension, I have around £80K in DC pots currently.
Having struggled financially after my divorce, pension wasn't my main priority. I paid in but like many, bills came first. Instead of focusing saving into either pension or savings accounts, I prioritised renovating my home. A rundown Victorian terrace in a rundown area of Birmingham was all I could afford, and it needed work – a lot of work.
Renovating the house worked out well for me, though probably that’s because of rising property values as much as anything else. I reckon I spent about £25k on the house, paid the same in a deposit and ended up with more than double my investment back when I sold up. I haven't bought another property so that's actual money I now hold.
I could drip feed it into my pension, but I have plans to invest instead. I'm working on the assumption that half of that investment will go towards my retirement. The other half will just be kept as savings.
Which brings me to about £130k in savings towards my pension.
Predicted pension savings will match my current shortfall
According to the '20 x' approach, that makes me £198,000 short. At the current rate I'm saving (20% in total), I'll have saved another c.£198,000 (an actual coincidence!) in contributions over the next 22 years, but I intend to increase that contribution rate in the new year.
Which kind of ties things up in a bow, or does it?
Not quite. I've made a ton of assumptions here, and you know what assuming did, don't you? For example, I've assumed;
- That I'm going to work full time for the next 22 years. My health isn't amazing but I'm also approaching menopause. Current research indicates that 1 in 12 women will leave work early due to their menopause symptoms. I don't have the figures but suspect a good proportion of working women may reduce their working hours because of their symptoms.
- I've assumed that I can continue saving at least 20% into my pension until I reach 67.
How does my approach compare to some of the tools available on the market?
- MoneyHelper has an easy-to-use retirement calculator, which largely agrees with my assumptions and expected outcome. The only real difference is that it assumed I should target 60% of my income, whereas I changed it to target 66%
- My last pension was with Aviva, and I like some of their online tools. It, too, wanted to assume I would only need 60% of my income, but it seemed to think I was on track to achieve the income I wanted to target, once adjusted.
- My current pension provider is Aegon and I find their Retiready tool harder to use. It won’t include the State Pension in my plan unless I set my retirement age to 68 (my SPA is 67 and 7 months), even then it uses an old value of the State Pension. Even at 68, the Retiready Goal planner believes I’m short on my goals, but I can’t see the assumptions used in its calculations so don’t quite understand the outcome.
- Scottish Widows’ calculator didn’t allow me to enter my DB pension values but used the PLSA’s Retirement Living Standards to set my goals (so aimed for £33K as a ‘comfortable’ level of income, being closest to my actual goal). If I manually add on the DB pensions, I appear on track to the retirement income I want.
- Standard Life’s pension calculator must project my income forward when it assumed I wanted 50% of that income, as it came up with a figure of just under £31K. According to their calculator, I’m almost £4.6K a year short.
- Hargreaves Lansdown’s pension calculator believes I’m about £2.2K a year short of my desired income at retirement.
I could just keep trying different provider’s pension calculators, but the point is they all tend to approach the same question in different ways.
It’s hard for normal people to figure out what the ‘right’ answer is, when the industry itself can’t agree how to get there!!
Your own planning is key
There really is no ‘right’ answer other than to create a plan based upon your own circumstances, commit to it but then review and refine it regularly as things change.
Your employer should have information about pension schemes and be able to advise you accordingly and there’s always lots of information online, especially at times such as Pensions Awareness Week and Pensions Awareness Day.
Good luck with your pension planning!