Many employees fail to save enough for retirement, but a good educational programme can help.
There has been some interesting discussions with employees around when they expected to retire and how long they thought they were likely to live. There was generally quite a noticeable gap between expectation and reality.
This gap is also borne out by a range of objective studies. Chase de Vere’s own Longevity and Retirement Research has found that the under-65’s estimate that they will live to 79 years on average. But this is pretty wide of the mark.
According to the Office for National Statistics, the average life expectancy of today’s 65-year olds is 83 for a man and 86 for a woman. The man in fact has a 50% chance of living ‘til 87 and a 9% chance of making 100, whilst the woman has 50% chance of reaching 90 and a 14% of making 100.
This natural tendency to underestimate one’s life expectancy certainly does little to help employees with their retirement planning. Nor does widespread ignorance of the type of returns that can be achieved by a medium-to-low risk investment approach in the modern era.
Although the government’s auto-enrolment regime has at least ensured most employees are building up a measure of private pension provision, those benefiting only from the mandatory minimum contributions are still likely to find themselves woefully short of the type of income levels needed for a comfortable retirement.
Indeed, research by Scottish Widows shows that 47% of people in their 30’s and 40’s are saving inadequately for their retirement or not at all.
In most cases this is certainly not the result of people loving the workplace so much that they simply never want to retire! Our own Longevity and Retirement Research shows that 40% of the under 65’s want to retire as young as they possibly can and 70% of them by the traditional retirement age or sooner.
The major barrier to employees securing suitably-sized pension pots is undoubtedly ignorance, so employers should seriously consider implementing a financial education programme to help combat this. Doing so will also involve a certain amount of enlightened self-interest because helping employees to retire when they actually want to can greatly aid a company’s succession planning.
Chase de Vere is well placed to help with such educational programmes because, we have an independent financial adviser (IFA) arm.
In particular, our ‘The Road to Retirement’ module focuses specifically on making employees aware of the amounts they need to save to have the retirement they want, and feedback from clients shows that those who attend pay more into their pensions as a result.
As a broad rule of thumb, employees should expect to be retired for an average of 24 years, or a third of their adult life. Because outgoings will reduce as a result of less expenditure on things like clothes and travel and the availability of more time to shop around for better deals, they will only need a proportion of what they were previously earning – and this will vary according to the income bracket they were in.
Government guidelines are that those earning above £50,000 may need to replace only around half of their previous income but those earning around the average UK salary of £26,500 may need more like two thirds.
To replace 67% of £26,500 in retirement, producing an income of £17,755 (including the State pension), requires a pension pot of £355,100. This should not be too onerous for those who start saving young but the later people leave it the harder it gets.
For example, those who start aged 20 need save only £2,650 a year, but those who don’t begin ‘til 40 will need to stick away £5,565 a year, and those who leave it ‘til they are 50 will have to find £9,847 a year. So, the key is to educate employees to start saving as early as possible.
The value of an investment and the income from it could go down as well as up. The returns at the end of the investment period are not guaranteed and you may get back less than you originally invested.