How much should you save for retirement? The answer is it depends on the person. One person might be looking for a retirement full of travel while another wants something altogether more modest.
This brings challenges when it comes to setting pension policy and is a problem the government will need to grapple with as it gets ready to announce the second phase of its Pension Review, which will focus on adequacy. It’s a piece of work that will inform thinking around the state pension as well as workplace and private provision for years to come.
Setting goals too high can mean lower earners potentially oversave into their pension and risk struggling financially today. It could even put them off saving altogether. Setting the bar too low risks higher earners going through life thinking they’ve done enough and then getting a nasty shock.
The Hargreaves Lansdown Savings and Resilience Barometer looked at four key measures of adequacy to see which might help people work out if they are saving enough.
These included so-called “pounds and pence measures” which seek to put an actual figure on what retirees need to achieve pension adequacy. Pounds and pence measures include the Living Wage Foundation’s Living Pension benchmark which sets an income level to meet basic everyday needs in retirement for single and coupled households.
This can be seen as the absolute minimum that someone should be saving for retirement and it sets a target for pension contributions, either as a percentage of salary (12%) or a minimum cash amount (£2,950 for a full-time Living Wage employee).
Read more: Key questions to ask yourself to plan for a comfortable retirement
Hargreaves Lansdown also assessed the Pension and Lifetime Saving Association’s (PLSA) minimum, moderate and comfortable living standards benchmark for single and coupled household income.
The research looked at so-called relative measures, such as target replacement rates, which set an income level in retirement based on pre-retirement earnings. For instance, they may say someone needs to save enough to cover two-thirds of their pre-retirement salary.
A specially designed current retirement expenditure measure was also used. This sets an income level in retirement using current retiree spending by income group, relationship status and tenure status.
Analysis of these measures found using pounds and pence measures may not reflect of the current living standards of higher earners, so could lull them into a false sense of security. They can also give the impression that lower earners are falling behind, when in reality they don’t need to hit higher targets to maintain their current lifestyle.
As an example, the PLSA’s moderate retirement income standard is set at just over £31,000 per year. There are many people, particularly on lower incomes who can live happily on less than that, whereas a higher earner would probably need far more to maintain their living standards. It’s all about what your personal definition of moderate means to you.
Relative measures, such as target replacement rates, better account for the ability of households to maintain living standards into retirement. This would see higher earners given a much higher target to hit. For instance, someone targeting two-thirds of their salary in retirement would need an income of £20,000 per year if they were on £30,000 pre-retirement, while their neighbour who was on £60,000 when they were working would need something closer to £40,000 per year.
Read more: This under-claimed benefit could help boost your pension
After careful analysis, Hargreaves Lansdown believes the best approach is to take a relative measure, such as target replacement rates, as these give a better idea of people’s actual income needs in retirement. They can then set their retirement goals based on their experience rather than trying to hit a target that might not work for them.
However, we also need to have a minimum income underpin such as the Living Pension as a bare minimum for what is needed.
The key to getting a good outcome in retirement is to keep an eye on how your pensions are performing. Use an online calculator that gives you a sense of how much you are on track for. If it’s enough to meet your needs then great, if not you have time to do something about it.
Taking steps such as increasing contributions when you get a pay rise and tracking down lost pensions can also play a vital role in getting your retirement planning where it needs to be.
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