Saving £824 a month for retirement is the stuff of fantasy

RetirementThe average 30-year-old person wanting to enjoy a good retirement at the age of 65 needs to save at least £824 a month until they retire. That's the mind-boggling new statistic from the deVere Group.

To put that in context, based on the average salary of £26,500 that leaves just £1,384 a month, before tax, to pay for housing, food, heating, lighting, transport, clothing and all of life's other essential bills.
The average UK rent is currently £811 a month, according to HomeLet, so you can see how the pension saving might be something of a stretch. That's particularly the case if the person is also trying to save for a deposit to buy a home.

The magic number here is 75 – as in 75%. That's the percentage of your pre-retirement income the pension industry suggests you'll need as an income in retirement. But that's the pension industry.

What will this turn into in retirement?
So what will that £824 a month turn into? After 35 years of saving, you'll have a pension pot of £433,098.65, according to the Hargreaves Lansdown pension calculator.

Now that seems to me to be a lot of money, particularly if you have paid off your mortgage already.

Currently the average weekly spend of people over 65 is £295, according to the Office of National Statistics (ONS). So if you were able to withdraw cash from your retirement pot without restriction, you could happily draw cash from your pot at that rate for 28 years before the money ran out. And that assumes your retirement pot doesn't grow at all during your old age.

Alternatively, you could buy an annuity which would give you a guaranteed income until you died. At current rates, you could get an annuity of at least £24,000 a year, or £461 a week.

Again, that's a fairly high income if you've paid off your mortgage and have no housing costs.

Other factors to consider
So you really don't need to save as much as £824 a month especially when you consider the following points.

Our examples have looked at income from the perspective of one person but spending from the perspective of one household. However, a household usually contains more than one person. In fact, the average 65+ household contains 1.6 people currently, according to the ONS.

So there are likely to be two sources of retirement income. For example, if two people put away £200 a month from the age of 30 until 65, that would equate to a pension pot of £210,000.

What's more, don't forget your home which you may own outright. If you downsized and pocketed £50,000, that could boost your annual income by close to £3,000 a year.

Most important of all, you needn't be the only person contributing to your pension. Many employers are legally obliged to contribute to your pension pot if you're also prepared to contribute. All employers will be under that obligation by 2018.

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On the flipside, there are other costs that may crop up, for example care, helping out grandchildren and other family members. And I would also say that you can't rely on the State Pension or other Government benefits. Who knows what the Government will be prepared to pay come 2048?

Don't get me wrong – you need to save something for your retirement if you want to avoid carrying on working, or gambling on being helped by the state. The sooner you start, the better, even if it's only a small amount. And, of course, a pension isn't the only vehicle you could choose. We look at one alternative in Pensions vs ISAs: how to save for retirement.

But I hope this has made you slightly more positive about the future and debunked that £824 a month figure we started with.

*We have assumed charges of 1% a year, inflation of 2.5% compounded and real investment growth of 5% a year.

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Saving £824 a month for retirement is the stuff of fantasy

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.


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