How Big Should Your Pension Be?

by Thomas Riggs

Retirement, Pensions…we’re all wanting a comfortable lifestyle after years of work, but just how much is enough? Planning appropriately now for years in the future may seem daunting, but having an idea in place sooner than later will ensure your golden days are smooth and relaxing.

What You Will Need

I’ll cut to the chase: whatever you may think you will need for a comfortable retirement is probably not enough — sorry! Especially if you are only planning on relying on your State Pension; let’s use the UK as an example, with the help of some figures by the Pensions and Lifetime Savings Association.

“Research shows 51% of people focus on their current needs and wants at the expense of providing for the future and only 23% of people are confident they know how much they need to save.”

These figures evidence a lack of forward planning for a large number of people. At the same time, it shows an even lesser understanding of how much people should aim for, which is tougher to know; everyone’s situation is unique and one person’s target would be inappropriate for another. That said, any form of planning early on is prudent and setting a figure to work towards is a starting point.

“…a single pensioner would need a pension income of £10,200 to live a “minimum level” lifestyle in retirement. This is already slightly more than the current maximum new State Pension of just over £9,339 a year.”

“In fact, Profile Pensions estimates that a single pensioner could live comfortably on £17,818 a year, which would require a pension pot of £237,000 [~$317,000] at retirement… If you’re in a couple or don’t own your own home, you will need to aim for a higher income and pension pot.”

I, personally, don’t feel this is enough or the kind of retirement people want, but it certainly provides a minimum target to aim for. Of course, you may accommodate State Pensions, but you shouldn’t overly rely on that — have a look here for more info!

To expand upon this figure, many people aim for the illustrious-sounding $1,000,000 mark, which is definitely a more comfortable pot for your retirement, no doubt. However, even that may not be enough, depending on your lifestyle. It really does come down to your own lifestyle, needs and wants, but at least meeting minimal requirements should be the starting point when planning.

Setting Your Target

So then, how do you set your target?

One way to understand your target could be looking at averages, either your country (or anticipated residence for retirement). For example, in the UK:

“After a lifetime of saving, the average UK pension pot stands at £61,897…With current annuity rates, this would buy you an average retirement income of only around £3,000 extra per year from 67, which added to the maximum State Pension, makes just over £12,000 a year, just enough for a basic retirement lifestyle.”

Another method could be taking your average salary and multiplying it:

“Some advisers recommend that you save up 10 times your average working-life salary by the time you retire. So if your average salary is £30,000 you should aim for a pension pot of around £300,000.”

Or, saving a percentage of your salary:

“Another top tip is that you should save 12.5 per cent of your monthly salary. So if your annual salary is £30,000 you would save £312.50 a month – which over 40 years at 4% growth could build a pension pot of over £300,000.”

Moreover, where you aim to take 50-70% of your salary in retirement:

“For a quick estimate, try the ’50-70′ rule. This suggests that you should aim for an annual income that is between 50 and 70 per cent of your working income. So if you earn £50,000 now, you will want to achieve somewhere between £25,000 and £35,000 a year.”

Be mindful that the further away you are from retirement, the bigger your pot will likely need to be. owing to inflation and the general trend of increasing prices. Regardless, set a target and get going, even if that figure will change as you advance further into your years.

Building Your Own Pot

In this day and age, I believe that most people should be focussing on amassing their own pension rather than relying on the state pension alone, as it really only aims for a minimum target and won’t likely cover the lifestyle you desire. The earlier you start, the longer you have to amass your pot and aim for a comfortable lifestyle when you wish to stop working. Setting some form of a target will give you the discipline to work towards a goal and get you started on your savings.

You may wish to set a target, like the classic $1 million figure — this may be more than you need, be comfortable, or even fall short of what you want from your retirement, so think about your expectations and current lifestyle. Alternatively, use the aforementioned examples to work out a goal and get working towards it. You can assess your situation and use a retirement calculator to figure out what kind of target to aim for in today’s terms and what changes you need to make.

Unfortunately, one person’s target will not be appropriate for another, so you must assess your own life, needs and desires in the present and future to figure out a target to aim for. Using examples and examples can help you get started; it is likely that this target will change as you get older, earn more and near retirement anyway, but this doesn’t mean you shouldn’t get started with what you have now.

By all means, start moderately — assess what figure you need as a minimum and increase this target for a realistic retirement you are aiming for. Your savings will be dynamic, but starting early and when you are young will make things significantly easier. And keep it simple to get started!