How big does a pension need to be? That is the question, or versions of, that I am asked most frequently. I have worked in financial services for 17 years now. What I have learnt over that time and, related specifically to retirement, are two things.
Retirement and the period after work has changed significantly. Previously, people worked for one or two firms and when they retired, everyone gathered around their desk at their penultimate lunch break and the senior manager, having been tipped off, bought them a painting of a car they liked, or a rare caged animal. I once saw someone given a parrot. For many, it marked the end and created a void.
Whereas now and increasingly so, people have dynamic and portfolio careers. And when people do retire, it is the start of something new, not just the end of something that once defined them. I have noticed clients now frame themselves differently, post retirement. Whereas they would once say, “I used to be a solicitor at a global firm.” They now say, “I’m studying for my second degree in the subject my parents told me not to or I’m in training for an endurance event in Russia.” People now start their first business the day after they retire.
This makes planning for retirement exciting and wonderfully complex, both financially and emotionally. We talk now, with clients, about their “income glide path”. How do you want to spend it? Do you want to accelerate your spending in your first decade and then taper? We can create almost any solution to suit.
Our social networks are much wider and deeper than before and we demand more from retirement; which brings me to my final point. People focus on the size of the pension. The bigger the better, intuitively. But, more specifically, what I have noticed after listening and watching retirees is that it is the percentage of your working income, relative to your retirement income, is what makes all the difference to how retirement makes the person feel. The percentage of income, post retirement, frames whether they feel comfortable and without worry and is not determined by the overall size of the pension.
To explain, if you earn £8,000 a month (or insert any figure here) then a retirement income of anything less than 50% of this figure, when you retire, means retirement feels poor. With a mortgage paid, 50% is just about right. With that level of income, retirees are able to maintain the same lifestyle that they lead before retirement. You can spend time with the same friends, visit the same places and explore.
If you save just enough to cover 50% of your working income, there’s lots more we can do from a planning perspective. For example, we can “shape” your income to match the tapering down effect, in terms of natural spending, as you slow down each decade.
Achieving 50% of your working income is a relatively simple set of calculations but it does require a plan and some commitment. And when you have a plan, the size of your pension matters much less. How big is a good pension? “Big enough”, will be your answer.