A 30-year-old hoping to retire at 55 will have to save around £1,000 a month (net of tax relief), according to new research by the Pension Review Service (PRS). Putting aside £1,000 a month, it is calculated, should allow savers to accumulate a big enough pension pot to deliver an annual income of £26,000 in retirement.
While £26,000 a year in retirement income is equal to the average national wage and will provide a comfortable life, ‘it will not permit a particularly exotic lifestyle,’ notes the PRS.
The findings underline the importance of starting retirement savings as soon as possible.
‘A 30-year-old who starts putting aside £1,000 a month, increasing with inflation, could build a retirement pot of around £625,000 in (today’s money) by the time they’re 55,’ says the PRS’s Mark Abley. ‘If they’d started their pension pot five years earlier, they would have a pot of £668,000 at 55 – these figures assume that returns and inflation remain steady.’
However, the prospect of many classified as ‘millennials’ being able to save anything like £1,000 per month is low. While salaries differ widely per region, industry and skill, average monthly earnings of employees between the ages of 22 and 29 is between £1,829 and £1,924, while for those in their 30s it is between £2,331 and £2,535, according to the office broking service Instant Offices.
At the same time, the past decades of house price growth have meant many in the 20s and 30s age bracket spend a large chunk of those earnings on rent. The average millennial, according to the Landbay Rental Index, spends around a third of their monthly salary on rental accommodation.
The PRS notes that the £1,000 per month figure will not be realistic for many, however, it says, ‘you will be surprised how even the most modest contributions can grow with tax breaks and employer contributions.’
More realistically, many in the millennial age bracket will continue working well beyond the age of 55, which is way below the state pension age, currently set at 68 for a 30-year-old.
However, that’s not to say millennials shouldn’t be attempting to save for retirement. The PRS does note the importance of compound returns from saving earlier: ‘One of the keys to being able to retire at 55 is to give your pension pot as much time as possible to benefit from the effect of compound returns,’ says Abley.
‘It’s a complex process, but effectively by drip-feeding into the market over a sustained number of years, your pension fund will benefit from compound returns. Your original capital earns a return in the first year, in the second year both the original principal and the first years return benefit from any growth in the second year.
‘It’s very much like a snowball effect. As your capital rolls down the hill it becomes bigger and bigger. Even if you start with a small snowball, given enough time, you can end up with an extremely large snowball,’ he explains.
Just don’t expect ‘modest contributions’ to give you a £26,000 retirement income when you’re only a few years out of the ‘middle age’ bracket.
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