Ten numbers you need to know if you’re planning your retirement

{"text":[[{"start":6.95,"text":"“Most people spend more time planning their holidays than they do planning their retirements,” says Ben Kumar, an expert in behavioural finance at wealth manager 7IM."}],[{"start":16.75,"text":"No wonder. The aim is straightforward: to have enough money to live on comfortably in retirement. But planning to achieve that aim is hard. The unknowns we have to wrestle with are so large."}],[{"start":28.6,"text":"And they have grown. Previously, most Britons with private pension savings retired on a fixed income. This would be a pension from a defined benefit scheme or an annuity bought with a personal pension pot."}],[{"start":41.05,"text":"In private sector workplaces, defined contribution schemes now predominate, pushing investment risk on to the individual. That was always the case for personal pension investors. Now, neither group is compelled to buy an annuity. Instead, they can remain invested, drawing out incomes until they die — if they do not run out of money first."}],[{"start":63.25,"text":"Sir Steve Webb, a partner at consultancy Lane Clark & Peacock and a former pensions minister, likens pension saving to an expedition across an unfamiliar landscape where the route is obscured by “thick fog and shifting sands”."}],[{"start":77.3,"text":"Numbers can help. Data is what humans use to structure their thinking when uncertainties abound. I have selected 10 key numbers to help readers frame and deepen their retirement planning."}],[{"start":88.45,"text":"A warning applies. Anyone planning their retirement should start by defining their aims broadly in words, not narrowly in numbers. Anchoring expectations to inflexible figures — a specified high income in retirement, for example — can distort behaviour and lead to disappointment."}],[{"start":105,"text":"Sarah Coles, head of personal finance at investment platform AJ Bell, says the best starting point is to envisage the pleasant lifestyle you hope for in retirement. Think of life after work as an extended version of one of those holidays we surreptitiously plan during a dull day at the office. Ponder how you could finance it as a secondary task."}],[{"start":125.35,"text":"1) 85 years — average longevity"}],[{"start":128.15,"text":"“People systematically underestimate how long they will live for,” says Chris Curry, chief executive of the Pensions Policy Institute, a charity (disclosure: I’m a trustee), “They also underestimate how much private pension they will need.”"}],[{"start":142.35,"text":"You can get a sense of what the latter sum might be from average longevity. This is currently 85 for a 65-year-old in England and Wales. Women are forecast to beat that target by just over a year, men to undershoot it by a little less."}],[{"start":157.45,"text":"But remember, life expectancy naturally increases by diminishing amounts the longer folks live. A woman who is 81 has an even chance of reaching 90."}],[{"start":167.75,"text":"Plan for a retirement where you beat the averages and have the resources to live comfortably while doing so."}],[{"start":null,"text":""}],[{"start":174.35,"text":"2) 3.8% — median withdrawal rate on a £250,000-plus pot size"}],[{"start":181.5,"text":"If you have a defined contribution pension fund, how fast should you draw on it when you retire? No one wants to run out of money. But pointless scrimping and saving is to be avoided too."}],[{"start":192.3,"text":"Figures from the Financial Conduct Authority show that people with large funds tend to make the slowest inroads. I have inferred a median annual drawdown rate of 3.8 per cent from the data on the assumption that rate choices are evenly distributed within the sample group."}],[{"start":207.20000000000002,"text":"That rate of withdrawal should be sustainable over a lengthy period. If anything, it would be too low. A common rule of thumb is to take 4 per cent of the fund in the first year of drawdown, uprating the amount annually by inflation."}],[{"start":221.50000000000003,"text":"Most pension savers have much smaller pots and empty them much more quickly."}],[{"start":null,"text":""}],[{"start":227.00000000000003,"text":"3) 50% — your target replacement rate (TRR) "}],[{"start":231.60000000000002,"text":"This is the officially endorsed estimate of the percentage of working income a comfortably-off Briton needs in retirement to enjoy a lifestyle equivalent to that during working years."}],[{"start":242.25000000000003,"text":"Towards the upper end of the income curve, the TRR should be lower than 50 per cent, assuming nightly trips to the casino are not on the agenda."}],[{"start":251.55000000000004,"text":"Life is generally cheaper in retirement. Commutes are a thing of the past and no National Insurance is payable. We tend to spend less as we age, because we are less active."}],[{"start":262.1,"text":"The qualification is that many Britons do not even achieve the TRR advised for their income group when they retire."}],[{"start":269.65000000000003,"text":"4) Nearly a third — share of a single, well-off pensioner’s income made up by the state pension"}],[{"start":275.75000000000006,"text":"Back in the day, poorer rural retirees would grumble about local toffs joining the queue to collect pensions at the post office."}],[{"start":283.15000000000003,"text":"Then, as now, the UK state pension was a near-universal benefit. At £12,548 yearly, it is a handy sum, even for many better-off retirees. Within the top income quintile of retirees, it supplies around 30 per cent of the readies for a single person and 16 per cent for a couple, according to official data."}],[{"start":304.15000000000003,"text":"Always factor your state pension into your retirement planning. These caveats apply. First, remember that above the personal allowance, the state pension is taxable income. Second, do not rely on the triple lock. This shield against cost-of-living pressures raises the pension annually by inflation, average earnings or 2.5 per cent, whichever is highest."}],[{"start":326.50000000000006,"text":"The triple lock is fiscally unsustainable. Sooner or later, it will be dismantled."}],[{"start":332.1000000000001,"text":"The same budgetary pressures may prompt government to accelerate increases in the state pension age. It is currently rising in small steps over two years. After March 2028 it will be 67. An increase to 68 between 2044 and 2046 may occur sooner."}],[{"start":null,"text":""}],[{"start":349.50000000000006,"text":"5) 4 in 10 — divorce rate by 25th wedding anniversary"}],[{"start":354.20000000000005,"text":"Relationships make pension planning more complicated, particularly if you are female."}],[{"start":359.6,"text":"At the age of 43, a woman’s median pension wealth — if she has any — is £46,000, according to research by the PPI. For a man, it is over £77,000."}],[{"start":371.95000000000005,"text":"The scale of the disparity, according to Heidi Karjalainen, a senior research economist at the Institute for Fiscal Studies, results primarily from career breaks, typically to look after young children."}],[{"start":384.90000000000003,"text":"If the relationship ends in divorce, the woman will have median pension wealth of around £65,000 by her early fifties, compared with £150,000 for the man."}],[{"start":395.8,"text":"Couples who stay together should plan and review retirement finances together, Coles says. Forget about the traditional gender split that puts women in charge of the weekly household budget while men invest for the long term. "}],[{"start":408.3,"text":"Karjalainen adds: “There are heartbreaking stories of older women whose husbands told them everything was under control financially. When the man died, the widow was left with only the basic state pension.”"}],[{"start":null,"text":""}],[{"start":421.05,"text":"6) 8% — minimum contribution rate "}],[{"start":424.7,"text":"This number should trigger a whooping klaxon of the kind that precedes the meltdown of a nuclear core in a disaster movie. It represents the danger of believing you can provide for a comfortable retirement cheaply."}],[{"start":437.9,"text":"The lowest permissible contribution from qualifying earnings into a workplace defined contribution pension scheme is 8 per cent under so-called “auto-enrolment”. This legal duty requires employers to sign up all staff who do not opt out."}],[{"start":453.34999999999997,"text":"The contribution split is 5 per cent from the worker and 3 per cent from the boss. Like most pension contributions, both are tax free."}],[{"start":461.65,"text":"The snag is that the minimum of 8 per cent gross qualifying earnings — which discounts the first £6,240 of salary — has become a default for many. It is the only funding for a third of auto-enrolled scheme members."}],[{"start":476.65,"text":"This is not enough to generate an asset large enough to retire comfortably on. The 8 per cent rate therefore features as a useful warning for any pension saver. "}],[{"start":485.65,"text":"Suppose a 30-year-old is earning £40,000 gross annually, generating 8 per cent minimum contributions of £2,700. On conservative assumptions, I calculate they would get a pension worth just under £10,000 a year in today’s money if they retired at 65. "}],[{"start":503.7,"text":"Total contributions would need to rise to £5,700 a year, 17 per cent of qualifying earnings, to support a private pension equivalent to a desirable two-thirds of final salary when the retiree started receiving the state pension. "}],[{"start":517.85,"text":"Webb says savers should exploit financial victories to bump up contributions: “Make the most of pay rises. This is the least painful time to increase the amount you are setting aside.”"}],[{"start":null,"text":""}],[{"start":528.8000000000001,"text":"7) 2.8% — inflation (for April)"}],[{"start":533.2,"text":"Personal investment can be enjoyable. But, in reality, it is a dogged struggle against the declining purchasing power of the pound in your pocket."}],[{"start":541.6,"text":"I suspect fund managers mostly quote nominal returns because using inflation-adjusted numbers, which are lower, make them and their clients feel depressed."}],[{"start":552.9,"text":"The rational pensions investor has no such qualms. We should always knock off inflation (and charges) when assessing returns on our portfolios. These could be growing within self-invested personal pensions, individual savings accounts or defined contribution workplace schemes."}],[{"start":569.15,"text":"I believe diversified equities held for at least seven years are the best protection against inflationary nemesis. A portfolio in which they are the main component has made me a real return of over 5 per cent a year over the last 15 years. Hardly spectacular. But none of the risks I took kept me awake at night. "}],[{"start":588.55,"text":"8) 2.4% — care home incidence"}],[{"start":592.05,"text":"They will put me in a care home when — to paraphrase Charlton Heston — they prise my cold dead, hands from the armrests of my Parker Knoll recliner. I have learnt avoidance tactics from the best of the best: the older generation of my own family."}],[{"start":606.9499999999999,"text":"The odds are already stacked against it. Census data shows that 3.2 per cent of women and 1.6 per cent of men over the age of 65 live in care homes at any one time. Most stays last less than two years. That makes debilitating care home costs a low financial risk in my book."}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":625.8499999999999,"text":"I mention this because many Britons overestimate the likelihood of ending up in a care home and staying there an expensively long time. Apologies, meanwhile, to readers who think care homes are great."}],[{"start":636.8,"text":"9) 60% — median residual wealth at age 90"}],[{"start":641.4,"text":"It is always good to keep some money aside for emergencies. But do not overdo the buffer if you have retired with a healthy level of personal assets. "}],[{"start":650.55,"text":"According to official data, average total wealth — which often includes semi-vacant family homes — drops only around 40 per cent by age 90 from its peak in a person’s early sixties."}],[{"start":661.8,"text":"In my view, seniors could usefully pass on more of our assets to younger relatives earlier than we generally do. Money is more useful to offspring as gifts when they are starting families than as inheritances, which may be subject to tax, when their own retirements are looming."}],[{"start":null,"text":""}],[{"start":677.0999999999999,"text":"10) 7.6 (out of 10) — mean happiness score at 65 plus "}],[{"start":682.8499999999999,"text":"My final number is, I hope, a positive one to end on. Data derived from public surveys on subjective topics such as wellbeing are at the fuzzier end of statistics. So there may be false precision in the finding that Britons are a few percentage points happier after the age of 65 than they are before it."}],[{"start":702.55,"text":"Even so, that data suggests that the failure of most people to build up big pensions does not damage the wellbeing of the majority."}],[{"start":710.8,"text":"Other behavioural research provides contemporary underpinning to a perennial belief across cultures and history: the last chapters of a life are better spent in warm connection with others than cold calculation of one’s means."}],[{"start":723.9,"text":"My conclusion is that we should plan for retirement in the round. Our thinking should include our partners, our heirs and that most peculiar unknown: the people we become after retirement. They will have emotional needs as profound as we have while still working."}],[{"start":744.25,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780747120_2099.mp3"}