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How much fun is retirement going to be?

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Recent research by AJ Bell concluded that today, someone retiring at age 65 needs a pension pot of £447k to be comfortable in retirement.

We see these sorts of figures from time to time, and of course much depends on what assumptions you use to calculate them – and in this case, on your definition of ‘comfortable.’  AJ Bell’s starting point is the UK’s average salary of £28k a year.  From this they deduct the full State Pension (although not everyone gets that) of around £8,770, and conclude that private pension provision needs to provide £20k a year. Then they accommodate the prediction that 56,000 people in the UK are expected to reach 100 by 2020.  Finally, they have made calculations allowing for investment returns and inflation.

The figures that AJ Bell has reached are perfectly reasonable, but don’t take a number of factors – such as geography – into account.  If, for example, you live in London, prices and costs of living may well be higher and your pension pot will need to be greater.

The elephant in the room, for the pensions industry at large, is that we all know that most savers are not putting enough into their pension pots.  Those relying solely on minimum automatic enrolment contributions are highly unlikely to get near to a pot size of £447k, especially if they did not start saving in their early 20s.

The research shows that in order to hit this target, a 25-year-old would need to start saving £235 a month. For a 25-year-old, though, the thought of retirement in 40 years’ time may not seem a priority. Those with a student loan, trying to put a deposit together for a house and then pay a mortgage, and possibly already settled with children, will understandably prioritise other calls on their income over pension savings. I did when I was 25.  Leave it to age 35, however, and you need to put £428 per month into your pension pot to achieve the same result.  At 45 it’s £859 a month!

Of course most couples will not need twice the pot size, as they live in one house and have shared bills.  But they will need more than £447k, which is based on a single person being comfortable.

‘Comfortable’ here is assumed to be the UK’s average salary, but much will depend on your own expectations.  If you don’t run a car and take those holidays abroad, and you don’t need to be the Bank of Mum and Dad to your children…and your mortgage has been paid off, and provided your white goods don’t break down too often, and you remain healthy and don’t need any care, you might get away with less.

This is a very serious issue, which pension savers need to take heed of –  especially those who are young enough to be able to make a real difference by saving more earlier – but on the whole I am not sure that this particular elephant is actually still visible enough, and making enough noise.

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