Retirement income targets analysis

hugheskevi

Targets for income in retirement seem to have become dominated by the Pension and Lifetime Saving Association's Retirement Living Standards. There are issues with the methodology, and many on this forum consider the latest set of Standards rather inflated, especially those required for the 'Moderate' and 'Comfortable' standards of living.

Nonetheless, references to these standards are just about everywhere now. So I thought it might be helpful to go over other possible approaches and show what the results give for the net income of pensioner couples.

(1) PLSA Retirement Living Standards:
Minimum - £22,400 p/a
Moderate - £43,100 p/a
Comfortable - £59,000 p/a

(2) Which Retirement Income Targets
Essential - £19,000
Comfortable - £28,000
Luxury - £44,000

Methodology at this link.

(3) Pensioner Income Series
DWP publishes a robust survey of Pensioner Incomes each year. They also include a tool to enable analysis of the dataset.

Using the most recent data to look at the net income before housing costs of couples under age 75 (weighting to median net income):

• £17,300 (bottom quintile)
• £24,000
• £30,800
• £39,900
• £60,800 (top quintile)

(4) 2004 Pension Commission (page 142)
The Pension Commission used benchmark replacement rates for pensioner income adequacy, based on actual income replacement rates at the time to assess income adequacy. The figures used were (for an individual, £p/a based on Annual Survey of Hours and Earnings latest gross pay for full-time employment at the 10th, 30th, 50th, 70th and 90th percentile):

• £18,100 - 80% of gross earnings for lowest earners
• £20,000 -  70% between lowest and median earners
• £23,800 - 67% for median earners
• £27,300 - 60% between median and top earners 
• £33,400 - 50% for top earners 

Recall that these are based on individuals. To adjust for this, the figures could be adjusted by equivalisation scales, which suggest a single person needs about 67% of the income of a couple to have the same lifestyle. After subtracting income tax from this adjusted figure, the following values are derived:

• £26,700 (lowest earners)
• £28,800
• £33,500
• £37,600
• £45,000 (top earners)

Summary
There is reasonable consistency across all the four approaches above, but the PLSA Moderate and especially Comfortable do appear quite high, and the 'Which' standards are rather more in line with the experience of younger pensioner couples today.

Perhaps it would be better to simply use less descriptive bands (as words like 'comfortable' mean different things to different people) and use income bands instead of specific values. A subjective judgement based on the above might be something like:

• Low - up to £23,000 p/a
• Medium - £23,000 to £40,000 p/a
• High - £40,000 to £60,000 p/a
• Top - over £60,000 p/a

Albermarle

Perhaps it would be better to simply use less descriptive bands (as words like 'comfortable' mean different things to different people

Also I do not think most peoples perception of a luxury retirement would be possible on a couple getting £44K pa.
More like £144K .

af1963

Perhaps it would be better to simply use less descriptive bands (as words like 'comfortable' mean different things to different people)

 ... and "comfortable" is actually used by PLSA and Which to represent two entirely different lifestyle profiles, one of which claims to require twice the income of the other.

OldScientist

A very nice summary of the different sources.

I've always thought the DWP data (number 3 in your list) or the broadly equivalent ONS data to be useful since a) 'quintiles' are precisely defined and are unlikely to suffer from misinterpretation like the descriptive labels (as @af1963 points out the fact that 'comfortable' can be used for two very different income ranges should raise flags) , and b) it can be a useful approximation to assume that the equivalent quintiles in income when working largely map to the income when retired (of course, frugal savers in the lowest quintile might be able to move up a quintile, while profligate spenders in the higher quintile might drop down in retirement).

Linton

I think that using predefined fixed bands is not helpful except  perhaps for a first pass rough order of magnitude. Better in my view is to keep detailed records of your actual annual spending, thenremove the things that will no longer apply and add in some extra for the things you will have more time to do. You have taken 30+ years getting used to a particular standard of living, why should this change when you retire?

HHarry

Albermarle said:

Also I do not think most peoples perception of a luxury retirement would be possible on a couple getting £44K pa.
More like £144K .

 I think that is always going to depend on the couple.  I’ve based our retirement planning on £35k - my Wife and I have been through it numerous times to find any glaring errors, but we’re comfortable that that’s enough.

We’re currently doing 3 years on £25k a year from our house sale proceeds.  16 months in we’re literally thousands under budget and having the time of our lives!

michaels

hugheskevi said:

Targets for income in retirement seem to have become dominated by the Pension and Lifetime Saving Association's Retirement Living Standards. There are issues with the methodology, and many on this forum consider the latest set of Standards rather inflated, especially those required for the 'Moderate' and 'Comfortable' standards of living.

Nonetheless, references to these standards are just about everywhere now. So I thought it might be helpful to go over other possible approaches and show what the results give for the net income of pensioner couples.

(1) PLSA Retirement Living Standards:
Minimum - £22,400 p/a
Moderate - £43,100 p/a
Comfortable - £59,000 p/a

(2) Which Retirement Income Targets
Essential - £19,000
Comfortable - £28,000
Luxury - £44,000

Methodology at this link.

(3) Pensioner Income Series
DWP publishes a robust survey of Pensioner Incomes each year. They also include a tool to enable analysis of the dataset.

Using the most recent data to look at the net income before housing costs of couples under age 75 (weighting to median net income):

• £17,300 (bottom quintile)
• £24,000
• £30,800
• £39,900
• £60,800 (top quintile)

(4) 2004 Pension Commission (page 142)
The Pension Commission used benchmark replacement rates for pensioner income adequacy, based on actual income replacement rates at the time to assess income adequacy. The figures used were (for an individual, £p/a based on Annual Survey of Hours and Earnings latest gross pay for full-time employment at the 10th, 30th, 50th, 70th and 90th percentile):

• £18,100 - 80% of gross earnings for lowest earners
• £20,000 -  70% between lowest and median earners
• £23,800 - 67% for median earners
• £27,300 - 60% between median and top earners 
• £33,400 - 50% for top earners 

Recall that these are based on individuals. To adjust for this, the figures could be adjusted by equivalisation scales, which suggest a single person needs about 67% of the income of a couple to have the same lifestyle. After subtracting income tax from this adjusted figure, the following values are derived:

• £26,700 (lowest earners)
• £28,800
• £33,500
• £37,600
• £45,000 (top earners)

Summary
There is reasonable consistency across all the four approaches above, but the PLSA Moderate and especially Comfortable do appear quite high, and the 'Which' standards are rather more in line with the experience of younger pensioner couples today.

Perhaps it would be better to simply use less descriptive bands (as words like 'comfortable' mean different things to different people) and use income bands instead of specific values. A subjective judgement based on the above might be something like:

• Low - up to £23,000 p/a
• Medium - £23,000 to £40,000 p/a
• High - £40,000 to £60,000 p/a
• Top - over £60,000 p/a

Thanks for the research, can see it turning up in a newspaper column under someone else's byline....

Am surprised the lowest decile is so high compared to this:
https://ifs.org.uk/tools_and_resources/where_do_you_fit_in

ader42

Albermarle said:

Also I do not think most peoples perception of a luxury retirement would be possible on a couple getting £44K pa.
More like £144K .

Tbh I think you’re wrong, but I appreciate it depends on the social circle within which one moves. 

My retired parents in-law would consider £44k luxury, my less well-off and older elderly mother lives on pension credit quite comfortably (hair-dresser & meals out twice a week, taxis wherever she wants to go etc) and would feel wealthy if she had £18k a year and no housing costs. 

There is also a world of difference between someone just retiring aged 60 in London who wants some travel and a hectic social life of concerts (with tickets costing hundreds per gig) and an 80 year old stay at home in the North East.

So labels like minimum, essential, comfortable and luxury are a nonsense without specifying at least more accurate geography, age and pre-retirement income band.

It would be more helpful to say things along the line of people needing a minimum of x% of pre-retirement income to maintain their lifestyle; but that approach doesn’t sell financial products and services. 

However, surely we can at least say that the minimum/essential is at the level of Pension Credit, and anything above that simply moves you further up the chain. 

Chewbecca

Based on my own spreadsheets I define a “very comfortable” retirement income as about £80k pa for a couple. That’s still short of luxury though, there are many additional spends I could / would add in to make it luxury (mainly through spend on cars, tech and home improvement - all of which are minimal in my £80k). 

”Moderate” I would define as about £35-£40k based on our outgoings so, for me, those numbers look right-ish.

Bluebell1000

Based on our current spending, £25k per year would be a pretty luxurious lifestyle in my opinion. Though that doesn't include one-off spends like replacing a car, or large house repairs. I guess it depends on what you see as being luxurious. For me, I reckon it's the ability to buy Muller corner yogurts without wincing at the price 😅

Linton

We find that total average expenditure of about £70k/year for 2 people is “very comfortable” in that we can buy anything we want. It is limited by our wants rather than our finances. Any extra pleasure in buying more stuff is minimal as would be buying a £50 bottle of wine instead of a £10-£15  one. The one “luxury” exception is  holidays whilst we are young enough to enjoy them.