Baby boomers face a financial crunch, with figures revealing almost half of workers over 60 won’t have enough money to fund the lifestyle they want in retirement.
As many as 49 per cent of the still-employed generation aged 60 to 80 are not expected to reach their retirement goals, according to research for The Mail on Sunday.
The problem is particularly acute for those who do not have a defined benefit work pension, which pays a guaranteed income in retirement. But experts say older workers should avoid burying their heads in the sand and act to improve their retirement savings while they are still earning. Here are the steps you can take if you are approaching retirement with pensions that will fall short.
How big is the problem?
The analysis by investment giant Vanguard, based on a survey of 2,200 working baby boomers, shows a seismic gap between those with defined benefit pensions and those without.
Defined benefit (DB) schemes – commonly referred to as final salary pensions – offer an income based on salary and years of service.
They were once commonplace but have been almost entirely phased out in the private sector. The vast majority of workers now save into defined contribution (DC) schemes.
DC pensions are based on an individual and their company’s contributions and investment returns, with a pension pot built up that must be turned into retirement income.
Some 69 per cent of baby boomers with DB pensions are expected to meet their retirement goals, but as few as 28 per cent of those with DC pots will.
Georgina Yarwood, senior investment strategy analyst at Vanguard Europe, says: ‘It is concerning that half of baby boomers aren’t on track to meet retirement goals, given their proximity to retirement.’
Saving your retirement
Most people want to enter retirement with a similar standard of living to what they had while working.
But it is important to remember retired people incur lower bills than workers, saving on the cost of commuting, lunches and clothing, among other things.
Benchmark figures from the Pension and Lifetime Saving Association put the annual cost of a moderate retirement at £31,700 for an individual, or £43,900 for a couple. These figures are after tax and exclude housing costs. The individual or combined pension pot required for this is between £330,000 and £500,000.
If you are expecting your pension to be insufficient, it’s not too late to take action.
Five-step plan
1. Track old pension pots
To begin, make sure you know where all your pension pots are and contact former employers to check on those which may be missing.
Calculate how much all your pensions are expected to be worth. There is £31.1 billion currently sitting in unclaimed or inactive pension pots.
2. Review spending
Double check your spending assumptions and be prepared to lower expectations. Ed Monk, associate director at Fidelity International, says: ‘With the cost of retirement rising and expectations shifting, it’s vital savers understand what lifestyle their savings can realistically support.’
Ms Yarwood adds: ‘Those who are unsure what an appropriate spending goal might be can make use of online retirement calculators to determine what a realistic goal is.’
3. Delay retirement
You could postpone retirement for a few years or continue to work part-time. This would help you add to your pension pot at the same time as reducing the amount you will need to draw from it.
It also means you can defer your state pension, which would give you a 5.8 per cent uplift for each year you delay claiming. If you are in good health, this could mean thousands of pounds extra over your retirement, but you would lose out if you don’t live as long as expected.
4. Look elsewhere
Consider other sources of capital that you can draw on to supplement your retirement income, and savings pots that could be invested for better returns.
Andrew Tully, of financial advice firm Nucleus, says: ‘Consider savings in other sources such as Isas, investments and bonds. And if these are invested in cash, as most Isas are, they could be invested in equities or a balanced portfolio.’
Beyond your savings, you can also choose to access your home equity, Ms Yarwood says. You can do this via equity release, which allows homeowners to take out a loan of up to 60 per cent of the value of their home. Beware this comes with new debt that increases with interest. An alternative is to downsize.
5. Boost pension investment
Re-evaluating your pension investments, especially if you have some years before you reach retirement, could allow your pot to grow considerably before you access it.
Mr Tully says: ‘Consider where your pension is being invested. If you are in a “default” fund this is likely to be very conservative or low risk. There may be other options available if people want to take more risk.’
Many pensions are ‘lifestyled’, which means your investments are de-risked as you approach retirement to help smooth out volatility. This can drag on returns and may not be suitable for you.
Mr Monk warns not to de-risk too early if you intend to remain invested into retirement. And remember your investment horizon, and potential for returns, could continue well into your retirement.