Without wanting to sound dramatic, there are a few reasons we should be worried about a potential ‘pensions crisis’.
The average state pension is £164.35 per week and the average pension pot is £61,897 meaning, based on current life estimates, £208.33 per week. Overall £372.68 is below current minimum wage so for those unprepared will be unlikely to allow people to continue living the way they did while employed. While this might seem small now if the current societal trends continue the way they are they may end up indirectly stretching retirement funds thin. So, let’s go over some of these factors.
Life expectancy, while stalling slightly over the last couple of years, has continued to increase in the UK since the 1980s. It also only takes small advancement in medicine or other public services to see sharp increases in this figure. According to the most recent figures we have on life expectancy from 2019, the current average at birth is 79.3 years for males and 82.9 years for females. However, for people already aged 65, this expectancy increases to 83.6 for males and 86 for females. This equates to approximately a 10% increase in the length of people’s lives since the 1980s and current estimates predict that around half of all children born today will reach the age of 100!
So, our pension pots will have to last longer.
The cost of living is currently increasing. In the last decade prices have increased by 29.07% while average inflation rate was at 2.58% meaning that the spending power of your money has decreased in this time. In conjunction with this, average wages have only increased by 4% in the same time meaning people have less money to buy more expensive goods and services. If this trend increases your savings could be worth considerably less by the time you reach retirement age.
Unfortunately, we can’t rely on the government for any respite. When this situation arises the usual response is to slowly increase state pension and retirement age. However, this can’t happen forever as we will always be chasing inflation or working when we are 80. Although we don’t want to cause any unwanted stress hopefully this shows that you have to think about supplementing this yourself. This is where our strategy will hopefully help, we aim to solve this issue by making a pension pot using small amounts of savings by outpacing inflation.
First you will need to work out how much you will need in retirement.
The amount you will need will depend on how you want to live your life, but generally the FCA, when asked, states that you need to aim for around 3-4% withdrawal per year. This will allow your pot to last for the aforementioned 20 years you are expected to live for while also having some left over for emergencies or luxuries. The current average withdrawal rate is 8% so people’s pensions clearly aren’t allowing themselves to live the way they want for the full amount of time you will likely be retired. At 8%, the pot will only last 12.5 years. So, set your pension pot goals based on what you spend now or how much you plan to spend in retirement based on the idea that you will spend 3-4% of it a year and you should plan for it to last at least 20 years.
In terms of depositing into your pot the amount and regularity will depend on how old you are and how much you want. According to HMRC, on average, people pay £2,700 into their pension a year and even if this is done for every year of a 30-year working life it will only get you to £81,000, but most people won’t put that much in every year. So, if we can’t deposit enough to live how we want we need our money in increase more than inflation.
The way we like to do it by using investment funds which generally perform well over this figure and then some. On average most major stock markets in the world increase by around 10% per year and investing in index funds allows us to tap into this return to provide for ourselves. By getting more from our money we don’t need to put in so much. We say around £600 a year, the price of a coffee a day, invested into an index fund will provide a hefty sum in 20 years. To plan this out we tend to use thecalculatorsite.com to work out what we need to input and what returns we need to reach our goals.
Currently 45% of over 55s in the UK feel unprepared for retirement, this is an alarming statistic especially taking into account that the country’s pension situation only looks like it will worsen. It is never a bad time to take action to make sure we don’t end up worrying about our financial futures. Although it may seem like a long way off for some of you the earlier you start the more you will have in the end and the less you will have to input to reach your goals.
So, to find out more about how to create your own pension pot check out our online courses!