As reported by the World Economic Forum, the headlines state that British men have not saved enough to pay for 10.3 years of their retirement. Whilst, women are going to live 12.7 years with no retirement income.
The latest study by World Economic Forum reveals how long people in six major economies (UK, USA, Australia, Canada. Netherlands and Japan) will outlive their pension savings. However, the UK is not the worse out of the six, as the honour falls onto Japan. (16.1 years men; 19.9 years women) The USA is the best performing out of the six countries (8.3 years men. 10.9 years women).
Taking a closer look into these assumptions behind the World Economic Forum, it suggests that:
· Contributions – The working life is from age 25 with retirement at the age of 65. Contributions begin at 3% of salary and increase by 1% each year to 9%. The starting salary is $30k – just under £24,000.
· Retirement income from the age of 65 is 70% of the expected final pay.
· Life expectancy for a 65-year old male in the UK is 18.8 years and for a female is 21.3 years. For other countries, the assumptions reflect the longevity of the country.
The headline is therefore misleading as in reality, the data from the report is based upon estimated contribution rates and local investment returns with a 70% income from the age of 65 until local life expectancy. This data is more of a comparison of returns and investment strategies which ultimately do not reflect reality, mainly in the UK.
Moreover, those that are dependent on auto-enrolment, the expected contribution rate will be higher than what will actually be paid. The expected contribution rate will by 7% and not 9%. Additionally, this is based on total earnings when the earnings are below the lower earnings limit. Currently, £6,136 per year, are excluded.
On that basis, it’s unlikely that the 70% income will be delivered for many years as the data from the report suggests.
The 70% income does not include the state pension which the individual will receive. People that are on the earnings used; this could deliver 30% of their final earnings. 70% of the final earnings is usually the recommended retirement replacement income for someone that is earning £24k per year. Whilst their state pension can mitigate the difference in contributions and the number of years with no pension, it may not make up all of the missing 10 years.
Ultimately, this report focuses on pension savings and it does not consider using housing wealth to supplement savings. Luckily, 70% of those who are retired own their own homes. With this, they can either rent out a room or move to another property to release some money in the process.
About Stuart Mosley
Stuart Mosley (CeFA, CeMap, CLTM) founded SJ Financial Solutions in June 2005 having spent 12 years with big corporates such as Halifax and Santander. He felt the personal touch and straight speaking was missing from financial and mortgage advice services and set up SJ Financial Solutions to change this.
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