Saving for retirement: how much is enough?
Many people wish to maintain their standard of living from their working life into retirement, but few have a clear idea of what’s required to achieve this goal. We help you to work out how much you’ll need – and how you can get there.
Large numbers of people are not saving for their retirement simply because they are unsure of how much they will need. That’s the result of a recent survey by BlackRock, the US investment manager. It found that 45 per cent of respondents didn’t know what amount of savings would allow them to maintain an equivalent lifestyle through their retirement years. Yet it also found that 77 per cent of respondents would not only save but would also increase their savings if they knew how much they would need.
No matter what you earn and expect from your retirement, there are two key steps you must take if you wish to maintain your standard of living. First, you need to work out how much will be enough – the amount of monthly income necessary to meet your expenses and those of your family, and to cover any emergencies that may arise. And, second, you need to devise a savings and investment strategy that will generate that income every month for the rest of your life.
Deciding how much you need
We are living longer, so we must anticipate a longer retirement too. According to the Organisation for Economic Co-operation and Development (OECD), average life expectancy in countries such as Switzerland, Japan and Italy now exceeds 80 years (an increase of 10 years since 1970), while the United States, Chile and a number of Central and East European countries have an average life expectancy of between 75 and 80.
Longer retirement means you will need more disposable cash – but how much exactly? Various studies have suggested you need at least 70 per cent of your pre-retirement income to maintain a similar lifestyle in retirement. For example, a 2008 report from the US consultancy firm Aon found that the average US retiree would need 78 per cent of their pre-retirement income to maintain the same lifestyle, based on analysis of 20 years of data from the US Consumer Expenditure Survey.1
Of course, this figure is only applicable to the US. In countries with more generous state pensions, it could be possible to maintain the same lifestyle with a lower proportion of pre-retirement income. Equally, in countries with less generous state pensions, a higher proportion could be required.
Moreover, unless you are very close to retiring, you may have no idea what your final pre-retirement income will be. Many experts have therefore devised rules of thumb to give you an idea of whether you’re saving and investing enough, no matter what your age. For example, Charles Farrell, a US investor and author of Your Money Ratios, recommends that, to hit the 80 per cent target by the age of 65, you should aim to accumulate:
- 1.4 times your annual income at age 35;
- 3.7 times your annual income at age 45;
- 7.1 times your annual income at age 55; and
- 12 times your annual income at age 65.
These ratios represent the total amount of money that the author recommends should be saved by the age in question, including pension contributions – an important consideration, since most pensions receive some kind of tax relief.
Also, it’s important to note that these ratios were devised primarily for a US audience. In other countries, the equivalent ratios could be greater or lower, depending on the generosity of the state benefits available to elderly citizens.
Ultimately, any measure of this sort will only be a rough guideline and not a precise estimate that can apply to everyone. The amount of disposable cash you will need will depend on your individual circumstances – for example, when you plan to retire, what you plan to do and even the country in which you retire.
There are many other ways to estimate how much money you need to raise in order to give yourself a particular standard of living in retirement, and it is worth comparing the results from several before you settle on a specific goal. For example, the UK government-backed Money Advice Service provides a helpful pension calculator.
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What to do next and how Barclays can help
Once you have a particular level of retirement income in mind, you need to consider how you will raise a sum large enough to generate this income, and what currency you will need to meet your retirement expenses as they arise.
Your precise needs will depend on your individual circumstances, so if you have a Relationship Manager2 with Barclays International Banking then your first priority should be to give them a call to discuss your goals. They can put you in touch with one of our Investment Advisers, who will assess your circumstances and help you devise an appropriate strategy. Please note, however, that we cannot give investment advice to clients based in the UK.
If you are concerned that you have not saved enough towards your retirement then you may wish to ensure that you are paying all you can into your pension – especially if you have a company pension in which your employer matches your contributions. However, you may also wish to consider investing as a way to make up any shortfall.
First, however, you should ensure that you have enough money in an accessible savings account to cover your living costs – and those of your family, if you are providing for them – for at least three months. This emergency reserve will help you to avoid dipping into your retirement pot should you become unable to work or face an unforeseen expense. See our article ‘Cash for a crisis: building an emergency fund’ for details.
If you are more than five years away from retirement, investing could give you the chance of generating greater returns, although you will need to be comfortable with the risks involved.
Research by Barclays and others has shown that, historically, investing for longer than five years has tended to generate greater returns than cash left in a savings account over the same period. However, it is important to remember that past performance is not a reliable indicator of future performance and that, when investing, you may lose some or all of your capital.
If you intend to move to another country when you retire then you may wish to choose investments that are denominated in the currency you will eventually need. For example, Barclays International Banking offers a variety of managed funds and structured products denominated in US dollars, euros and sterling.
All these products are held offshore, in the international financial centres of the British Crown Dependencies. So, if you are concerned about the financial stability of your home country then you may find that they are able to give you greater peace of mind that your investments are secure. Please note, however, that investments may fall in value as well as rise, and you may get back less than you invested. There are exchange rate risks to consider if you hold wealth in a currency that is not the one you will ultimately need to cover your expenses, and using an offshore account may have tax implications that you should discuss with an independent tax adviser – Barclays does not offer tax advice.
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