Why you need £250,000+ to live comfortably on the State Pension
At the present time, the average salary in the UK is around £28k. Of course, this varies significantly depending upon the region, with workers in London earning significantly more than other parts of the country.
However, it provides a good guide as to how much an individual will require in order to live comfortably in retirement. Historically, a pension of around two-thirds of an individual's salary would see them enjoy a financially-free retirement, since costs such as childcare, commuting and a mortgage would not be present in later years. This means that the average worker in the UK needs a pension of around £18,750 per year.
The problem facing people across the UK is that the State Pension is simply inadequate at the present time. It amounts to just over £8,500 per year, which means there is a shortfall of £10,250 for the average UK worker who expects to live comfortably from a pension of two-thirds of their salary.
Furthermore, the State Pension is coming under pressure from an ageing population. Increasing life expectancy means that retirement is getting longer for many people, and the government is responding by increasing the retirement age. In the next couple of decades it would be unsurprising for the State Pension age to move beyond 70 - especially if the prospects for the UK economy remain relatively downbeat following Brexit.
As a result of the shortfall from the State Pension, investing in a defined contribution scheme is a requirement for the vast majority of individuals. Certainly, defined benefit schemes are still available in some professions such as for public sector workers. However, they are likely to be diluted even further as their costs rise. As such, having an ISA, lifetime ISA or pension product in place should be a financial priority for all individuals in the UK.
In terms of the amount required to enjoy a comfortable retirement, a pension of £10,250 per year would require a nest egg of around £256,250 at retirement. This assumes that an individual will withdraw 4% per annum, which should mean that there is still above-inflation growth from the portfolio in the long run. This should allow the portfolio to fund a long retirement without major concerns of the capital being completely eroded.
Building a portfolio
While obtaining a £250,000+ portfolio by retirement may sound impossible to many people, it could prove to be much easier than expected. With the FTSE 250 having generated 10% per annum returns in the last 20 years, investing small amounts regularly in a variety of stocks or tracker funds could lead to significant sums being accumulated by the time retirement comes along. Even for people in their 40s, 50s and 60s, it is not too late to start planning for retirement, with the FTSE 100 appearing to offer a bright future at the present time.
While the State Pension is useful and will help individuals in retirement, it is insufficient on its own for the average worker. As such, investing in shares through a tax-efficient vehicle seems to be a sound idea - especially given the rising pension age.