How much income will we need when we retire? – Part 2!


Last week I worked out how much I was forecast to get (or not get!) in retirement using Age UK’s pension calculator, this week it’s the turn of the Money Advice Service’s (MAS) pension calculator. Both are simple to use, but rather than using the pension values forecast by your pension company as with Age UK, MAS asks for your current pension values and contributions. You need just your latest payslip and pension statement.

Step-by-step process

  1. Step 1 you enter your date of birth, gender, and age at which you’d like to retire.
  2. Step 2 you enter your gross salary, and as with Age UK it automatically pre-populates your target retirement income. Based on which of the 5 salary bands you fall into, MAS will pick a figure for you in the range of 50% to 80% of your salary. Age UK allows you to alter this amount at this step, but with MAS you have to wait until the final step if you want to amend your target income.
  3. In step 3 you enter the value of any pension pot you already have saved, along with the amount of any gross contributions you and your employer are making.
  4. In step 4 you see some results – the size of your forecast pension pot, the amount you could take as a 25% lump sum, and what the remainder could provide as a likely retirement income. At this stage, you can add in any final salary pension details, it adds in your state pension (based on the new flat-rate pension, unlike Age UK which is out of date), and you can add in any other income you might be expecting. Unlike Age UK, it doesn’t seem to allow you to enter a lump sum amount you might have saved.
  5. In the final step 5, you can see the income and shortfall for both the state pension age, and your preferred retirement age if different. You can now adjust pension contribution amounts, retirement age, and salary to see what impact it has.

Comparison of Age UK and MAS calculators

MAS worked with a higher target gross income based on my salary band than Age UK. If I changed this so the targets were the same, it forecast a more generous income than Age UK, despite allowing me to take 25% as a lump sum. This is possibly because it assumes I buy a level annuity at retirement, whereas Age UK assumes I buy an index-linked annuity which keeps pace with inflation, though I’m not sure if the extra expense of an index-linked annuity would account for all the difference.

Other assumptions seem similar – both assume investment return of 5% before charges, though MAS assumes you pay slightly less in charges (0.75% compared to 1%-1.5%). MAS assumes a higher rate of inflation 2.5% compared to 2% with Age UK, and MAS assumes you increase savings by 2.5% a year (same as inflation), while Age UK assumes you’ll increase savings by 3% (inflation + 1%).

I’m too far from retirement to care too much about these differences – both show me I have a big shortfall and need to seriously up my savings if I don’t want to work for another 25-30 years, as well as giving me an idea of what I need to be aiming for with these savings.

Which do I prefer?

I prefer Age UK’s version, as it tells you how much you need to save per month to meet any shortfall. This for me is the most useful part of the exercise.

You can also play around with increasing / decreasing monthly savings to see what effect it has, whereas MAS only allows you to increase / decrease your pension contributions, expressed as a % of salary, rather than a monetary amount, which is more confusing.

However, doing both is a useful exercise, and both confirm the same basic fact – I need to save a lot more each month.

Other calculators out there?

The other calculators I checked were not as personalised, and more useful as a guide for starting to visualise what type of lifestyle you might want in retirement.

As an example, the Standard Life Retirement Tool asks you to tick a box indicating which activities you might like to do when retired. It begins with basic living costs of £9,500, and as you add certain activities you see how the amount you’d need saved to fund that lifestyle increases. For example, if you’d like a weekly dinner or drink with friends, your target income increases to £11,375. Add a 2-week European holiday in the sun, you’ll need £14,250. Running a new car is quite expensive (see my earlier post on car finance for my thoughts on this!), and if you tick them all, you’ll need £35,087.50 a year. I ticked all except the 4-week winter holiday in the sun, so mine was £29,587.50, which is more than the target income used by both Age UK and MAS. It’s no surprise a company offering savings and investments would use a larger figure to encourage us to save more, but it still gives an idea of what we might need. There’s no option though to input your personal details or to show if you are on track.

Quiz about your retirement lifestyle

A thisismoney article from April last year takes a questionnaire approach, asking you 13 lifestyle questions with a conclusion based on a ‘mostly As / Bs / Cs’ response. The answers probably won’t tell you anything about yourself that you don’t already know – frugal, average, extravagant – but I like it because it includes some Hargreaves Lansdown figures on what you need to save to achieve that lifestyle assuming you’re starting from scratch at age 30, 40 or 55. It shows you in simple terms how the longer you leave it, the larger the monthly savings become. Also that if you’re starting from age 40, saving only £100 a month is not going to buy you a very comfortable retirement.

I’ve included a summary of the figures here:

  • For a more luxurious lifestyle, you’ll need £27,500 a year, which requires a pension pot of £390,000 not including state pension. For this you’ll need to save £385 a month from age 30, £700 from age 40, and £2,550 from age 55.
  • For a mid-range lifestyle, you’ll need £17,000 a year including state pension, which means saving a pot of £180,000. That’s £175 from age 30, £330 from age 40, or £1,200 from age 55.
  • The penny-pinching scenario is based on an income of £10,000 a year, where you’d need to save £45 from age 30, £80 from age 40 and £300 from age 55.

Hargreaves Lansdown savings calculator

The article includes a simple calculator at the bottom for monthly and lump sum savings, so you can see what your savings will be worth based on how much you save, over what time period, and at what interest rate. There’s a more detailed version on the Hargreaves Lansdown website – you can see how much your current savings will be worth in the future, how much you need to save now in order to reach a savings goal, and how long it will take to reach a specific goal based on your current savings rate.

I’m in my forties and too far from retirement to worry too much about the assumptions and detail in any of the above, but they do give me an idea of how much extra I need to be saving each month. They also give me a starting point to come back to each year, to see how my situation has (hopefully!) improved. I might not be able to save as much as these calculators tell me I should be saving, but it’s clear that making some progress will at least get me part way. Keep positive!

Image: Pixabay: howzitlondon

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