How much should I save for my retirement? To top it off: £600,000!

Inflation has pushed a comfortable retirement further out of reach for many savers, who now need to build a pot of nearly £600,000 to achieve financial freedom, new research finds.

The rising cost of living requires an extra £4,200 a year to maintain the same lifestyle as last spring.

And you need to save another £69,000 to generate that amount of annual income, the study found.

“These eye-popping sums are simply unaffordable for retirees, many of whom have small pension pots of their own and few options to pay more pension contributions,” said Alice Guy, head of pensions and savings at Interactive Investor.

“The high inflation of the past 18 months has had a devastating impact on the purchasing power of people’s retirement income, meaning they need a lot more retirement income to maintain the same purchasing power.”

II drew on the influential research on living standards from the financial sector group the Pensions and Lifetime Savings Association, which calculates how much people should save for a simple, moderate and comfortable retirement.

It looks at what kind of lifestyle a single or couple can expect in old age, based on how much they manage to save – but keep in mind that the numbers don’t include housing costs, so you’ll need more if you’re renting a house or pay off. mortgage.

Because the PLSA figures were based on data from April 2022, II calculated the impact inflation would have had on the required income and required pot size in July 2023 for an individual saver – see tables below.

Both the PLSA and II grades assume you are eligible for the full state pension, which provides guaranteed income until your death, such as an annuity or final salary pension.

The full rate was raised by 10.1 per cent to £10,600 a year last April, and state pensions are expected to rise further by around 8 per cent to £11,500 next spring. Married couples have to save smaller private pots than single people, because they benefit from two state pensions.

Impact of inflation on the income needed for retirement

Source: Interactive Investor

“For a moderate retirement, pension savers need private retirement income of around £2,600 more than last year and £42,800 more in their workplace or in their private pension pot,” says Guy.

“Those on minimum pension incomes will need a whopping 61 per cent more private pension income compared to last year just to maintain the same standard of living and more than £23,000 more in their pension pot.”

II used the same assumptions as the PLSA to calculate the private pension pot needed to generate enough income for a no-nonsense, decent and more luxurious lifestyle, namely that you could generate £6,200 of annuity income for every £100,000 in your pot.

However, average annuity rates have improved and a deal for a single 65-year-old, with no inflation protection and a five-year guarantee in case you die prematurely, will currently set you back £7,310 a year. However, if you want 3 percent inflation protection, it’s £5,319.

Impact of inflation on pot size needed for retirement

Source: Interactive Investor

II notes that in reality, most people invest their retirement and live off the income in retirement, which depends on the financial market performance they can achieve with their fund.

“While past performance is not an indicator of future results, retirement savers can become convinced that stock prices have a rich history of outperforming inflation,” says Guy.

But she warns that there is a danger that taking more money out of your retirement pot could have longer-term consequences for your wealth and could lead some people to run out of money earlier than planned.

Meanwhile, she adds: “There are also signs that high inflation is starting to ease. The Bank of England expects inflation to fall to around 3 percent by mid-2024.

“A minority of retirees have an inflation-resistant final pay pension, but even with final pay pensions the increase is often limited to 3 percent or 5 percent, so retirees will have to stretch their money further in times of high inflation.”

Guy says if you’re struggling to stretch your income, you should check your eligibility for a retirement credit that will complement this and provide access to a range of other benefits.

She also suggests, “Check your retirement costs and investment performance, as some retirement plans charge much more than others.

‘It can also be worthwhile to combine small pension pots, so that your pension becomes more manageable. But it is important to get good advice, so that you don’t miss out on any important benefits when transferring.’

> Can you afford your ideal retirement? Read what to do if you are afraid that your pension will fall short

Retirement Income Needs for Singles (Source PLSA)

Retirement Income Needs for Couples (Source PLSA)