Is a million pounds enough to retire on?
The FT's personal finance editor Claer Barrett looks at how much money is enough to retire on and whether to put pension savings in an annuity or invest it in stocks
Produced and edited by Jamie Han, Graphics by Kari-Ruth Pedersen, Additional footage: Bloomberg
Transcript
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CLAER BARRETT: Is a million pounds enough to retire on? A number of studies suggest it might not stretch as far as you'd think. Let's imagine a healthy, 65-year-old man wants to swap his 1 million pound pension pot for an annuity. That's a regular income paid every year for the rest of his life.
He would get around 43,000 pounds a year. But that means he'd need to live for another 23 years to get all of the money back. And it's not linked to inflation, so the purchasing power of that money would decrease over time. If he lived for longer than 23 years, he'd still receive the annual income. But if he died, that's it. There's no money to pass on to his heirs.
So what about if you keep your pension savings invested in the stock market? Well, it's riskier. Stocks can go down as well as up. But investors can draw down a regular income, hoping that investment growth ensures their pot doesn't run out. Now, that 1 million pound pot over 30 to 40 years can generate around 33,000 pounds a year according to projections made by the Pensions and Lifetime Savings Association and Interactive Investor.
But that's assuming that your investments grow at 3% a year above inflation. Of course, there's no guarantee that would happen. So how much do we need to save? Some financial advisors say you should take your age, halve it, and then save that percentage of your annual salary into a pension.
I'm 42, so that would mean saving 21% of my salary. And for the record, I'm actually saving a bit more than this, but I am the Money Editor. But the Institute and Faculty of Actuaries looked at three scenarios for a 68-year-old who also gets the full state pension which is around 8,600 pounds per year.
If they saved 86 pounds per month throughout their working life, that would fund what they call a minimum standard of living in retirement, an annual holiday in the UK, and a budget of about 38 pounds for the weekly shop. Pay in a bit more, $799 pounds a month, and that could fund a moderate standard of living, so a two-week holiday in Europe plus 46 pounds on the weekly food shop. But for someone on average earnings, that is about a quarter of their salary.
Paying even more, 1,755 pounds per month would net you a comfortable retirement, they say, with regular beauty treatments, theatre trips, and a three-week annual holiday abroad. Now, those figures might sound high, but don't forget. You get tax relief on pension contributions and often, a contribution from your employer, too.
It's estimated that millions of people in the UK are not saving into a pension, particularly those who are self-employed. But the earlier you start saving the better. Even if it's quite small amounts at first, the compounding effect over time will boost your retirement savings. And the final lever you can pull? Working for longer. Speaking of which, I better get back to work.
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