How much do I need to save for retirement? To be well off – £600k!

Inflation blow: Many people have only a small private retirement pot, and limited options to save more

Inflation has pushed a comfortable retirement further out of reach for many savers, who now need to build a pot of nearly £600,000 to achieve financial freedom, new research reveals.

The rising cost of living requires an extra £4,200 a year to maintain the same lifestyle as in spring last year.

And you have to save another £69,000 to generate that amount of annual income, the study shows.

‘These kinds of eye-watering sums are simply unaffordable for pensioners, many of whom have a small private pension pot and little option to make more pension contributions,’ says Alice Guy, head of pensions and savings at Interactive Investor.

‘High inflation over the last 18 months has had a devastating impact on the spending power of people’s pension income, meaning that they need a lot more pension income just to maintain the same spending power.’

II used the influential living standards research by finance industry group the Pensions and Lifetime Savings Association, which calculates how much people need to save for a basic, moderate and comfortable retirement.

It looks at what sort of lifestyle a single person or couple can expect in old age, based on how much they manage to save up – but note that the figures exclude housing costs, so you need more if you are renting or still paying off a mortgage.

As the PLSA figures were based on data dating from April 2022, II calculated the impact inflation would have had on the income needed and the pot size required by July 2023 for an individual saver – see the tables below.

Both the PLSA and II figures assume you will qualify for the full rate state pension, which provides a guaranteed income until you die, like an annuity or a final salary pension.

The full rate was hiked 10.1 per cent to £10,600 a year last April, and a further state pension rise of around 8 per cent to £11,500 is anticipated next spring. Couples need to save smaller private pots than single people because they benefit from two state pensions.

Inflation impact on income needed for retirement 

Source: Interactive Investor

‘For a moderate retirement, pension savers will need a private pension income of around £2,600 more than last year and £42,800 more in their workplace or private pension pot,’ says Guy.

‘Those with a minimum pension income will need a scary 61 per cent more private pension income compared to last year just to keep up the same living standard and more than £23,000 more in their pension pot.’

II used the same assumptions as the PLSA to work out the private pension pot needed to generate enough income for a no frills, decent and more luxurious lifestyle, which were that you could generate £6,200 of annuity income for each £100,000 in your pot.

However, average annuity rates have improved and a deal for a single 65-year-old, with no inflation protection and a five year guarantee in case you die early, currently gets you £7,310 a year. However, if you want 3 per cent inflation protection, it is £5,319.

Inflation impact on pot size needed for retirement 

Source: Interactive Investor

II notes that in reality most people invest their pension and live off the income in retirement, which depends on the financial market performance they can achieve with their fund.

‘While past performance is not an indicator of future results, pension savers can be encouraged that share prices have a rich history of outperforming inflation,’ says Guy.

But she warns there is a danger that withdrawing more from your pension pot could have a long-term impact on your wealth and mean some people run out of money earlier than planned.

Meanwhile, she adds: ‘There are also signs that high inflation is beginning to ease. The Bank of England expects inflation to fall to around 3 per cent by the middle of 2024.

‘A minority of pensioners have an inflation-proof final salary pension, but even final salary pensions often have increases capped at 3 per cent or 5 per cent, so pensioners will have to make their money stretch further in times of high inflation.’

Guy says if you are struggling to make your income stretch, check if you are eligible for pension credit which tops it up and includes access to a range of other benefits.

She also suggests: ‘Check your pension fees and investment performance as some pension schemes charge much more than others.

‘It may also be worth consolidating small pension pots to make your pension easier to manage, although it’s important to take advice to make sure you won’t lose out on any important benefits by transferring.’

> Can YOU afford your ideal retirement? Find out what to do if you fear your pension will fall short

Retirement income needs for single people  (Source PLSA)

Retirement income needs for couples (Source PLSA)

This post first appeared on Dailymail.co.uk