From Special Report: At Retirement - May 2012
Carry on working
With retirement being a constantly changing subject for most people still employed, advisers must ensure clients stay on top of the latest changes
How much income do you really need in retirement?
This is a difficult, but important question to consider when planning how much to save, and how much you will need to live the life you may have become accustomed to. It is the right question to begin with.
When discussing this with younger audiences, I often use the following scenario as an example. Let us take a 35-year-old who has finished university, paid back some of his debt and has taken time to enjoy himself, but who now wants to think about his pension. He thinks he would like to retire at 65 and could live to 95, so the saving period is exactly as long as the retirement (spending) period.
To put it another way, in this example, every month’s salary not only has to pay for one month today, but also has to pay for a month in 30 years’ time. While I realise that it is not quite that simple in practice, it is very good way of illustrating the importance of saving. The normal response is one of panic and tends to lead to comments of: “It’s hard enough to make a month’s salary last for one month – let alone for another in 30 years’ time.”
What can be done to ensure people are prepared for their retirement?
In a previous life, I used to work for a retirement benefit consultancy and did some retirement counselling, and the question I always used to ask my clients was: “How much do you want to be earning on the day after your employer stops paying you?” This question elicited a whole range of answers from those who had no idea to those who had detailed income requirements all worked out.
In those days, we almost had a “maximum” to work to as most people were in final salary schemes and we could make some assumptions about length of service and salary. To some extent we have moved away from this, but we still have a maximum of sorts with the lifetime allowance. The big difference has been the lack of a guarantee and the need to convert whatever defined contribution pot people may have into a retirement income, with the investment risk moving from the employer to the individual.
How much do you need to earn in retirement?
There are a number of indicators that may suggest how much people need to earn in retirement. In 2010, the Joseph Rowntree Association conducted research and using their definition of poverty, their minimum income standard showed how much various households needed in 2010 to reach a minimum standard of living. The research found that a single person needed to earn at least £14,400 a year to reach this standard, and a couple with two children needed £29,200. These figures provide a good starting point for those trying to calculate how much they may need to earn in retirement, but the figures have moved on.
As an industry perhaps the key message we can take from this is the need to plan and focus on the specific need of individuals for whom work and retirement is a continually changing and challenging subject that is in their own hands