Rising life expectancy, lower investment returns and a move away from generous final salary pension schemes means the traditional retirement at ages of 60 or 65 are now unrealistic for most people.
We might even be witnessing the death of retirement.
Pension provider Royal London is warning that today’s workers will be forced to work into their late seventies and beyond if they want to enjoy the same level of pension as their parents’ generation.
Their new study, The Death of Retirement, looks at how long people will have to work to achieve a good quality of life in retirement if they only contribute at the minimum 8% levels required by the Government under the ‘automatic enrolment’ scheme.
They found that someone on average earnings targeting the ‘gold standard’ of a total pension of two thirds of their pre-retirement income, and securing inflation protection and provision for a surviving spouse, would need to work to 77 if they only contribute at the statutory minimum level.
Death of retirement – work until age 77 if you make the minimum pension contributionsClick to tweet
Royal London also found that someone targeting the ‘silver standard’ of half their pre-retirement income would need to work to just over 71.
In both cases this is based on someone starting to save at age 22 and continuing to contribute to their retirement savings each and every year until they retire.
The longer people wait until they start saving for retirement, the harder it becomes.
Those who start saving at age 35 need to work to age 79 for a “gold standard” pension with index-linking and provision for widows and widowers.
Delay the start of your retirement saving until age 45 and you would have to work into your eighties to make up the shortfall.
The report also looked at the position of people on higher incomes, such as those earning double the national average income.
It found that the goal of 67% of pre-retirement income is effectively unattainable for those who contribute only at the statutory minimum level; the more modest goal of 50% of pre-retirement income in later life is attainable by working to around eighty.
For individuals who want a good quality retirement without working well beyond traditional retirement ages, the report shows what level of contributions would be required.
For those aiming for a ‘gold standard’ pension with protection against inflation through retirement, contributions of around 20% of gross pay throughout a working life would be required.
Aiming for the silver standard of retirement income could be attained with consistent contributions of around 11% of earnings.
The report from Royal London also considered how far individuals can shorten their working life by giving up otherwise valuable features of pension provision such as protection against inflation through retirement and provision for a surviving spouse.
This more modest objective can generally be achieved several years sooner.
Commenting on the results, Royal London Director of Policy Steve Webb said:
“Getting millions more people saving through automatic enrolment is a huge step forward, but many face a cruel disappointment if they think that current minimum contribution levels will deliver them the sort of retirement they are looking for.
“Without significant increases in contributions, we could be witnessing the death of retirement.
“This report shows that today’s workers are unlikely to be able to secure the quality of pension provision enjoyed by many in previous generations without either working well beyond pension age or contributing substantially more.
“Even those who save systematically from the start of their working life could face working into their late seventies if they want to replicate the best pensions of those retiring today.”
Here at Informed Choice, we are not convinced that we are witnessing the death of retirement.
We do however need to rethink a traditional retirement and approach Financial Planning in later life in a different way to our parents’ generation.
Saving enough for retirement comes down to several factors; how much you can afford to save each month, how early you start saving, the investment returns you can achieve and your strategy for drawing an income in retirement.
All of this is very personal, with no two individuals planning for the same retirement.
Seeking professional advice and considering retirement planning as part of your overall Financial Planning is a very good way to save for the retirement you want.