Overview
What is a comfortable income in retirement?
A study by Pensions UK suggests that the annual gross income required for a comfortable retirement is £52,220 for a single person and £69,466 for a couple1. These figures assume that no National Insurance contributions are being paid, as they are not payable after State Pension age, and that a couple both have equal pensions. The study suggests Sainsbury’s for the weekly shop, holidaying in the Mediterranean for two weeks each year (supplemented by three weekend city breaks) and driving a three-year old Ford Fiesta replaced every five years2.
What retirement fund is needed?
Knowing how much income is needed for a comfortable retirement is one part of the equation; the other is what size fund is required to produce that level of income? Most people are choosing drawdown to manage their pension savings these days3. The report from the investment research company, Morningstar, suggests that 3.7% is a safe inflation linked annual withdrawal rate with a 90% probability of money lasting for 30 years (assuming a balanced investment portfolio)4. This means a single person, with a full State Pension, would need a pension pot of more than £1 million to meet the annual gross income levels highlighted by the Pensions UK study for a comfortable retirement. A couple, both enjoying a full State Pension, would require a combined pension pot of nearly £1.25 million.
The most appropriate safe withdrawal rate will depend on individual circumstances. Nevertheless, this does give an insight into retirement savings requirements to fund a comfortable retirement.
Options for a comfortable retirement
What options are there if someone is likely to fall short?
- Save more. An obvious solution is to pay more into their pension. A 55-year old planning to retire at 67, the State Pension age from 2028, could add £30,000 to their pension pot by increasing their pension contributions by £150 per month. If the employer matches their contribution this would double to £60,000 (assuming average annual investment growth at 5% compound).
- Delay retirement. Delaying retirement means:
- More time for pension pots to grow
- More time to make further pension contributions
- A higher State Pension (if retirement is delayed beyond State Pension age and the State Pension is deferred)
- Annuity rates increase, providing higher income levels, and more income can usually be taken from drawdown as the money won’t need to last so long.
- Accept a lower probability of success. The 3.7% safe withdrawal rate is underpinned by a 90% probability of money lasting for 30 years. If a lower probability of success is accepted, income could increase. This could be suitable where there is a backstop like property equity. A 70% probability of money lasting for 30 years could push the withdrawal rate to 4.6%5.
- Choose a shorter term. It’s common for a 65-year old to plan for a 30 year retirement, yet many people will die sooner than this. If life expectancy is likely to be reduced by poor health or lifestyle factors, a shorter term may be considered. If a 20-year term is chosen, up to 5.2% could be withdrawn with a 90% probability of success6.
- Take more income. Research suggests that 3.7% is a safe withdrawal rate if the intention is for money to last for 30 years, but this may be overly conservative. Someone could take more than this if they continually review their finances and adjust where necessary.
- Don’t fully inflation link income. Expenditure is often highest in the early years of retirement, then decreases over time (though it may increase again if there are care needs later in life). Morningstar analysis suggests that if income isn’t adjusted for inflation where the portfolio declined the previous year, the safe withdrawal rate could increase to 4.2%7.
- Work during retirement. Nearly 1.5 million people over the age of 65 are still working8. As well as the additional income working after retirement provides, it can offer opportunities to socialise and combat loneliness. Increasingly, it’s a bridge between work and retirement with the transition to outright retirement occurring after several years.
- Use other assets. ISAs and other savings and investments could be used to provide retirement income. Downsizing is another option. Any property equity is tax free if it’s from the sale of the homeowners’ primary residence. Alternatively, equity release allows people to remain in their home, but still release equity.
- Accept a reduced standard of living. The Pensions UK Retirement Living Standards study estimates how much is required for a comfortable retirement, but also considers how much is needed for a moderate level of comfort in retirement. The gross annual figures for a moderate level of comfort would be £36,483 for a single person and £48,590 for a couple9.