Over 40s have no idea of the cost of retirement

A shocking new study from Saga has revealed that four in ten people over the age of 40 have no idea of how much money they will need to retire on. It makes a mockery of the whole idea of retirement planning, and raises a very real risk of an entire generation who could run out of retirement savings.

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The study asked people to estimate how much they would need to live on each year in retirement, and 40% of them were clueless. They then asked people how big a pension pot they would need in order to generate their desired income, and an alarming 80% of people had absolutely no idea.

Miscalculations

The basic rule of thumb recommended by the experts is that people in retirement should aim for two thirds of the income they have while working in order to enjoy the same lifestyle. Again, a very rough rule of thumb for a very basic lifestyle is £10,400. For a comfortable lifestyle it's £1,600, and for a luxury lifestyle it's £64,000.

When asked to estimate what they will need, people tend to over-estimate the sum they need each year - at £13,600 for a basic lifestyle and £20,500 for a comfortable one. However, they grossly underestimate the size of the pension pot they need in order to generate this income.

When asked how much of a pension pot they need to generate £13,200, they suggested £126,000. Unfortunately this would generate just £6,904 - well below the basics. Even more alarmingly one in ten thought you could afford a basic lifestyle on a pension pot of up to £25,000 - which would pay just £987 a year.

When asked how much they thought they'd need in order to generate £20,500, they estimated £244,000 - which would only generate £13,300. Eight out of ten people said they did not know how big a pension pot you would need to achieve a comfortable retirement.

They were even more off the mark when asked how much they thought they'd need in order to generate the sum they thought they needed for a luxury lifestyle (£56,600). They guessed they'd need a pension pot of £500,000. However that would generate £27,000 - less than half the figure they expect.

The concern

Basic retirement planning starts with this figure - the amount you expect to live off each month - so our pension planning is crippled from the outset. The next step is to understand the pension pot you would need in order to generate this income - which we are patently terrible at. Only then can we work backwards to how much we need to put away today in order to hit our targets. If we have no idea what we are aiming for, it's no wonder so many of us are making such a mess of saving for retirement.

Sally Merritt, head of product, Saga Investment Services, commented: "Our survey demonstrates how important it is for people to take the time to think about their savings and investments as early as possible to give them time to put a little more away if they think they are not going to have as much as they need."

To be fair, the fact that we get things so wrong isn't entirely our fault. In order to do these calculations we need to make sensible decisions about our outgoings - which we cannot be absolutely certain about. We also need to know roughly how long we will live for - which we have no idea about. And we need to know how our investments will grow - which can never be guaranteed.

It means it's well worth either getting independent financial advice, or turning to a free online calculator, which will help estimate things based on averages and sensible rules of thumb. There are a number of these, including the Saga Look Ahead tool, the Aegon retireready calculator, and the Money Advice Service pensions calculator.

These will give you a good idea of the kind of pension pot you should be targeting, and will avoid your pension planning from falling at the first hurdle.