At the end of April, consumer magazine Which? published the results of a survey the group carried out in 2018 about the spending habits of its retired readers. The findings of the study contain some worrying information for future retirees.
The State Pension is not enough
The survey reported that the average monthly spend of the several thousand retired couples who took part was £2,200 a month, or around £26,000 a year. This total includes the “basic areas of expenditure” such as food, housing costs and bills as well as “some luxuries,” which provides for “European holidays” and eating out. Stripping out these luxuries, the basic costs alone amounted to £17,000 on average according to the survey.
The shocking fact is, the current basic State Pension comes nowhere near to meeting this figure. At the time of writing, the current full weekly State Pension is £168.60 (the actual rate you’re entitled to will vary depending on age, National Insurance Record and other factors) or a maximum of £8,767.20 a year for an individual.
In April 2018, the average rate of State Pension for a man qualifying after April 2016 was £151.84 and £143.85 for a woman giving a combined £15,375, which is £1,625 a year less than Which? readers think is an acceptable level of income to live off in retirement.
These numbers show clearly that the State Pension isn’t going to be enough for most retirees to survive in retirement. However, the good news is that it’s relatively easy to fill in this gap with your own savings.
Saving for the future
According to my calculations, to fill the gap between State Pension income and what is required to live comfortably, people will require savings of £43,000 by the time they decide to leave the workforce.
To arrive at this figure I’ve used the multiply by 25 rule which is a shortcut to figure out how much money you’ll need to save for your retirement. As the name of the rule suggests, you take your annual expenses figure (£1,700 in this case) and times by 25.
The sooner you start saving, the easier it will be to hit this target. For example, according to my calculations, a saver with 10 years to go until retirement, will need to put away £300 a month to build the required amount.
The best way to grow these funds is to invest your money, and you don’t even need to take much risk to achieve a comfortable level of retirement income. In the example above, I’ve factored in an average investment return of 5% per annum, which is around 2% below the annual rate of return the FTSE 100 has produced over the past decade.
If you have 20 years to go until you hit retirement age, then, according to my calculations, you only need to put away £110 a month to build the required amount, that is once again assuming an interest rate of 5% per annum. Savers with three decades to go until retirement age only need to put away £60 a month to build an adequate savings fund.
The bottom line
So there we have it. The survey shows that the State Pension is not enough for the average retiree to live on comfortably. However, by investing just a small amount every month, you can build a pension pot that will set you free from State Pension worries.