How much I should be saving each month to have a comfortable retirement?

By Cherry Reynard

There appears to be a conspiracy devoted to making pensions as baffling as possible. However, all most people want to know is whether they are saving enough to avoid penury in old age. Pension providers are fond of scaring people with big numbers, but the reality is that a comfortable retirement is within reach.

The first point is that you need to start backwards. You can’t work out how much you need to save without working out how much you’ll need to live in retirement. You may not have a mortgage any more, and your children may be off the books too, which will reduce your needs, but you will still need to eat, drink, put the heating on, drive a car and pay your phone bills. You may want the occasional holiday as well.

The Pensions and Lifetime Savings Association (PLSA) reckons that a single retired person needs £10,900 for the minimum standard of living. ‘Minimum’ means that you can keep the lights on and pay your bills, but not much else. If you prefer a little more luxury in your life – foreign travel, theatre trips or the occasional glass of prosecco, you’re going to need £20,800. To be ‘comfortable’ – a clothing budget, spa treatments - you’ll need £33,600. Couples can shave a little off for shared living costs, but they’ll need £49,700 between them.

You will then need a rough idea when you’re going to retire. If you’re hoping to do paid work into your seventies, you won’t need to save as much. If you can’t wait to throw off the shackles of corporate life, you’re going to need to get saving.

What’s the big number?

For a retirement income of £33,600, you’re going to need a pot of around £650,000 (https://www.hl.co.uk/retirement/annuities/best-buy-rates) to retire at 65. That may sound pretty eye-popping, but remember that the State, your employer and good old compound interest will do some of the hard work for you.

The state pension is valuable. It’s currently worth £185.15 a week or £9,628 per year. That brings down the amount you have to save by around £190,000, leaving you with ‘just’ £460,000 to find. You need to make sure you’ve made sufficient national insurance contribution, which you can check here: https://www.gov.uk/check-national-insurance-record.

If you are employed, your employer is compelled to provide you with a pension scheme and pay money into it on your behalf. You have to pay 5%, your employer has to pay 3% (though generous employers will pay more) and then there’s tax relief on top. As such, your actual contribution will be far higher than the amount you put in (roughly double, depending on the rate of tax you pay).

Then, finally, you have compound interest. If you cast your mind back to maths classes, this is the concept that if an investment is growing by 5% a year, in the first year you get, say, £100 x 5% = £105, but in year two, you get that 5% on the higher figure £105 x 5% = £110.25. This becomes more powerful the longer you do it, to the extent that a £1,000 investment, growing at 5% a year is worth around £1,650 a decade later.

So how much do I really have to save?

It is worth saying up front that saving anything is better than saving nothing. The worst possible conclusion from this type of exercise would be that it’s all impossible so it’s not worth saving anything.

That said, if you work backwards from the £650,000 ‘big number’, you can take off £190,000 for the state pension, then you can probably cut another £200,000 because that will be picked up by your employer and tax credits. That leaves you with a pot of around £250,000 to find, which doesn’t sound nearly so painful. If you save £300 a month for 30 years, you’d almost certainly get there.

There are other considerations. You need to ensure that your money is growing fast enough. You’ll need to save a whole lot more if your money is only growing at 1-2%. Stock market investment has typically delivered higher growth and more protection against inflation than cash. If you’re investing for 20-30 years, it’s usually a better option, even though it will bounce around a little.

There is no magic bullet on retirement savings, but if you do some of the work yourself, the state, your employer and compound interest will step in to help. The key is to start as soon as you can and not to squirrel away everything in cash. A comfortable retirement is within reach.