Most of us don’t realise how much retirement will cost.
Long gone are the days when a retirement income from the state would be enough to keep you afloat in your golden years. Today, retiring is more expensive and our savings are worth less thanks to drops in interest rates. Today, roughly one in seven people retires without any form of personal private pension. That’s millions of people facing a retirement in poverty.
Avoiding having less in retirement
Curating the right pension pot for your retirement is not something that can be done by guessing. None of us has the power to predict the future but we can work out what kind of lifestyle we’d like to have – and then plan for retirement by estimating the costs that we’re likely to incur trying to lead it. According to research by financial planning and investment firm Tilney, people aged 45 – 65 underestimate how much they are likely to need for retirement by around $80,000 – a fairly significant shortfall. The only way to make sure you have a pension that meets your lifestyle needs is to start thinking about, and planning for it, now.
The basic costs of retirement
The Tilney survey established that most of us spend less on housing during retirement than at any other time in our lives. The goal of paying off mortgages prior to retirement often results in reduced – or mortgage free – living, which can significantly take the pressure of lifestyle spending as a result. However, not everyone manages to do this. And as first time buyers are now being priced out of the market until much later in life, larger mortgage payments and potentially rent payments are likely to be a much more significant factor in retirement for Millennials, for example. Add to that the cost of utilities, insurance, the option of private healthcare and essential travel and these can add up to some pretty substantial basic costs.
The additional extras of retirement
The same Tilney survey identified that the less essential elements of retirement spending can often be the most significant. For example, while households spent roughly $190,000 on housing costs during retirement, they spent half that again on food and non-alcoholic drinks (with almost $5,000 on biscuits and cakes). Retiredhouseholds spent around a quarter of the cost of housing on utilities and the same on package holidays abroad. Most spent more on alcoholic drinks ($15,892) than on clothes ($13,300) and spending on pets and gardens was fairly equal at $4,000a piece.
What the Tilney research reveals is that it’s not always the costs that are the highest during our working lives that take the most from our retirement budgets. And if you want to have the kind of lifestyle that you imagine for your retirement – whether that’s foreign travel, dogs and cats or lots of long lunches – it’s in the extras where the costs can really mount up. So, when you’re calculating whether your pension is likely to meet your retirement lifestyle needs, start by looking at the ways that you want to spend your time and work backwards from there.