There is a mismatch between the income people believe they need in retirement and the actual cost of living, which means those who are not yet retired expect living expenses to take up just 34 per cent of their retirement income, whereas in actuality they account for 49 per cent.
85 per cent of those surveyed who have already retired consider their pension income sufficient
Millennials’ estimates were furthest from the reality; the survey showed that the younger you are the less you expect to spend on every-day expenses in retirement and the closer to retirement you get the more accurate your approximation.
However, despite the fact that they failed to accurately estimate the amount they would require for everyday spending in retirement, 85 per cent of those surveyed who have already retired consider their pension income sufficient.
The figure among those with an ‘advanced’ or ‘expert ’financial knowledge, was even higher at 91 per cent; even among retirees who describe their investment knowledge as ‘beginner’ or ‘rudimentary’, only 13 per cent of those surveyed said they had insufficient savings to live comfortably in retirement.
There was also a discrepancy between the levels of income people expected to receive and the reality; across the UK, workers expected to receive a retirement income of 66 per cent of their final salary, but the reality was an average pension of just 53 per cent.
Already undershooting expectation by a margin, this average retirement income percentage is likely to fall over the coming decades as more generous defined benefit pension (sometimes ‘final salary’) schemes are more common for current retirees than they are among those currently working.
In announcing these findings, Lesley-Ann Morgan, Head of Retirement at Schroders, highlighted the real danger that people were underestimating their basic living expenses and the level of income they will need to live comfortably in retirement: ‘There is no magic wand for savers. To avoid facing challenging financial circumstances on retirement, they need to recognise the need to start saving as much and as early as possible,’ she said. ‘Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up a savings gap.’
The cost pressures that future retirees are likely to face are increasing
This was echoed in a report from the Pensions and Lifetime Savings Association called ‘Hitting the Target: A Vision for Retirement Income Adequacy’ which revealed that only 20 per cent of respondents were confident they were saving enough for retirement, saying: ‘Future retirees are less likely to have an adequate retirement income than current retirees, due to lower levels of pension saving and the decline in home ownership amongst younger savers.
At the same time, the cost pressures that future retirees are likely to face are increasing. Increased and, in some cases, additional costs mean that savers will have to save more if they are to maintain their working age standard of living in retirement.’
The report found the greatest negative impact on pensioners’ lifestyle were longevity, the rising cost of care and increasing housing costs; however, it also found that workers were saving less, and that falling levels of home ownership would impact the retirement income of future generations.