How Much Pension Do You Really Need?

Samsonite1

This probably seems like a stupid question and many people say I should just plough as much money into my pension as possible until retirement, but I don't agree to a point.

If you go to the pension calculators they just return a set percentage of your salary as a target pension, but if you earn a lot I do not think you necessarily need to have anywhere near that amount. I tried a different view and looked at websites that tell you how much you need to maintain a certain life-style and this comes out much lower.

Considering that the plan is to not have to pay out for a mortgage or children (childcare, school fees, university, etc.), then the cost of living is going to be massively reduced and also the possibility downsizing from a large house to something smaller and cheaper would help too.

So I just don't know how much I should put into a pension - surely a modest life-style costs the same no matter how much you earned when you were working, so why not base target pension amounts on a figure rather than an arbitrary percentage?

Perhaps it is not easy to answer, but ideally I would like to know a range of what pension amount would be reasonably comfortable to live off with a modest lifestyle.

If you read all of that, well done!

bigadaj

Depends on your views on life really.

My view has always been to undertake the things that are important to me and then try and then try and save much of the value above that. Your expectations are going to be guided by what you currently or will earn, though if you are saving or investing heavily then you're effectively only earning a lower wage in terms of what you spend and need to live on.

So key thing is what are your priorities?

Many people target early retirement, and whilst I see the attractiveness of getting to a stage where you don't have to work, then full retirement seems like a big step, I'd prefer to work reduced days and hours or even work for a few months a year as I got older.

Jamesd has pointed out here before the options that people have and specifically that efficient use of income may well mean buying the cheapest place you can to allow more income to invest, is this soemthing you'd be happy with? Logically then maximising saving and investing to a reasonable degree makes sense, pensions particulalry where there are employer contributions, higher rate tax or salary sacrifice options. The new rules look like they make pension saving more attractive as you near retirement age as you can draw what you want. Similarly the increased isa limits help in investments or savings,
But it's a lot easier managing things on £50k a year than it is on £15k.

Personally I like travelling and holidays so prioritise this, but currently have a nine year old car even though I could have a new one as it's not important to me, depreciation is vary before you even consider the finance charges many people pay.

In terms of your final question then if you're happy with a figure then target that, you can then work back to the percentage investment figure and ideally be conservative on investment growth. The variables in the process are limited, being actual income, available income to save or invest, anticipated growth rates, charges and timescale; the first of those is fixed for many people so a quick sensitivity analysis by varying the other elements can quickly give some food for thought or allow decisions to be made and the consequences more easily understood.

justme111

Depends on how much it will sting to change lotus to ford . Matter of perception. Which is individual.

Thrugelmir

Samsonite1 wrote: »

This probably seems like a stupid question and many people say I should just plough as much money into my pension as possible until retirement, but I don't agree to a point.

The sums involved in order to generate a decent index linked income in retirement are sizable. Little point leaving until later in life. So many unknown factors. At least saving hard gives the option of early retirement.

Samsonite1

Thanks bigadaj. Using some online tools which base a target figure on things you would like to do each year (e.g. expensive holidays, home improvements, shopping trips, nights out, etc., etc.). Adding these in suggested a pension of under £25k per annum to have a relatively lavish life-style - this seems like a reasonable amount given the small amount of outgoings. Other sites which simply take your salary suggest target pensions of more than £60k per annum - this seems far too high, so that is why even though I feel £25k as a minimum target seems ok, I am not sure. But also bear in mind that I would expect salary to increase and due to the percentage system, even if I target £25k it will grow as the salary increases (hypothetically speaking of course).

Samsonite1

justme111 wrote: »

Depends on how much it will sting to change lotus to ford . Matter of perception. Which is individual.

Yes it does - I love cars, but happily drive a Ford as it's nice to drive and cheap

Samsonite1

Thrugelmir wrote: »

The sums involved in order to generate a decent index linked income in retirement are sizable. Little point leaving until later in life. So many unknown factors. At least saving hard gives the option of early retirement.

I suppose I am looking at making a decent pension, but perhaps put money into other things too to give me slightly more flexible long-term finances... a lot of options out there. I am also considering renting out my current London home and downsizing at retirement which will provide a decent income on top of that (£20k in today's rent).

PeacefulWaters

I've done my sums and reckon maintaining a decent size mortgage free house in middle class suburbia, running a modest car (with funds to replace on a five yearly cycle), paying for SkySports and getting away on holiday 2-3 times a year can be done on a joint income of less than £25k (inclusive of state pensions).

Take care to ensure whoever dies last can continue to maintain the lifestyle. Assumes the income is indexed as well, although you may prefer a slightly higher income in the more youthful years of retirement.

If your grandchildren live in Australia and you want to visit twice a year, £25k won't be enough. If they live within a few miles it should be comfortable.

jamesd

The target amount depends on the person. I use £12,000 for a minimum. £18,000 is the median average pensioner income so I use that as a target. Both including the state pension or money to pay that income until the state pension starts, then just top it up from then. Beyond that I add a substantial safety margin of at least 50%, better 100%, before I deliberately retire. I do this with a range of income drawing rates as well, from the 6% I normally use down to 4%. I also check with Firecalc to see what it says about failure rates based on US investment history.

Working and living in London gives you a significant advantage if you plan to retire in a lower cost area.

Most of the online pension tools will assume low growth rates for investments and will assume that income is produced by buying an RPI inflation linked annuity. Very few people buy inflation linked annuities because they are particularly poor value for money even compared to annuities in general. Tools typically ignore the state pension and planning for the times before and after it starts. Tools typically ignore all other income sources. The end result of such tools can either excessive money being paid in, later than necessary retirement or giving up on being able to live well enough.

When doing the planning it's also worth knowing that spending typically decreases throughout retirement. Some people then see a surge for residential care for typically only two or three years before death. A far smaller number will have that need for a more extended time.

Snakey

I want the option of early retirement and I make contributions via salary sacrifice with 6% matched and a 10% employer uplift on any extra, so for me I'm just paying the maximum in as I have no particular need for the income. I also think the next government are going to put an end to higher rate tax relief so that's another reason to make the most of it while it's still available - if that goes, I'll drop my contributions significantly (I don't trust the long-term availability of the 25% tax-free lump sum either, and once you take both of those out of the equation it's not half as attractive).

As I get older, I become less keen on economising. I'm only 42 and already I've noticed that about myself. The cost vs convenience thing is turning on its head. I don't want a hotel that's miles out of town, I don't want to "just have toast" unless I feel in the mood for toast, I don't want to spend an hour on the bus instead of a fifteen-minute train ride, I don't want to go into three different shops to find the cheapest washing powder (before buying it from the first one after all) - all things that I would have happily done what feels like only a few years ago. So God only knows what I'll be like when I'm sixty. I feel like I need to factor that in to my planning.

Provided I'm not sacrificing so much that life today becomes uncomfortable, I'd rather have too much money on retirement than too little. I'm sure I could work out a way of spending it.

geelamch

Whilst I agree with the posts above that life will be slightly less of a financial burden on retirement i think we will have more of a desire to help kids etc. my belief was always take a lump sum ( max) and do the dreams I always promised myself ,however on reviewing pension I am now leaning towards minimum lump sum and larger pension. If I do this I will have around £26000 pension ,wife will have about £8000 and dream of state pension to add to this. That would give us approx £45000 ,I don't think we have that at the moment whilst working due to living costs etc.
I know we have given up a lot to do this but I want to have options, if I want to turn the heating up then I will lol.
Want to be the pensioner who behaves like a thirty year old !