Jenny Lowe reminds investors why starting early when saving for retirement is vital.

For many investors approaching their golden years, the tumbling stock markets of the past 18 months have had a detrimental effect, resulting in an increasing number of people being forced to continue working.

In fact, according to figures from MetLife, just two out of five people who are close to the state retirement age believe they have saved enough to afford to be financially comfortable when they stop work.

The study among men aged 59 to 64 and women aged 55 to 60 shows one in three will continue to work either part-time or full-time in order to have a decent lifestyle, with one in five accepting that retirement will have to mean lowering their standard of living.

MetLife’s managing director Dominic Grinstead, says, ‘It remains the case that recent volatility and ongoing issues with final salary pension schemes and employers’ ability to fund pension schemes have hit the retirement plans of many people.’

Baby boomer burden
And independent pensions expert Dr Ros Altman claims that, demographically, this could hardly have happened at a worse time: ‘The baby boomers are about to retire, but they didn’t have as many children as their forebears. Fertility rates fell sharply in the 1970s so the proportion of workers to pensioners in the population is falling dramatically. There may not be enough taxpayers to pay their pensions.

‘In 1941 there were 5.6 workers for each pensioner, in 2000 there were about four, and by 2040 there will be just 2.6.
This will put a huge burden on future taxpayers as a much smaller number of taxpayers will have to fund a much larger number of pensioners in future.’

While the outlook may appear gloomy for those with only a few years of recovery time left before they retire, for young investors the old adage that it pays to start saving early has never been more true.

Delay now, retire later
Using published government data, Standard Life has calculated the real retirement age of many people in the UK who currently have no retirement savings as anywhere between 74 and 86. These ‘real’ retirement ages are when you would be able to retire with an income of two-thirds of pre-retirement salary.

However, Standard Life argues that it may not cost as much as you think to bridge the gap, allowing you to retire when you choose.

For example, let’s take a man currently aged 27 earning an average salary of £25,800 per annum. His state pension age will be 68. If he retires at 68 and has no additional retirement savings, he will retire on state pension benefits of 34 per cent of his pre-retirement income, or £170 per week. If this man chose to defer retirement until age 79, he would receive 66 per cent of pre-retirement income, through annual increases to state benefits because they have been deferred.

Setting your target
If, however, he decided to save for his retirement to fund the shortfall and retire at the state pension age of 68 on two-thirds of pre-retirement income, his target retirement pot would need to be £118,000, requiring an annual contribution of £1,850 (or £154 per month).

‘The holy grail of retirement saving is to fund an income worth two-thirds of your pre-retirement income. If people rely on the state in the hope or belief that the government will bail them out, they will either have to survive on a basic income throughout their later life or simply face the music and defer retirement until much later,’ says Andrew Tully, senior pensions policy manager at Standard Life.

‘Most people in the UK would like to retire at 65 or earlier. To achieve this goal with a decent retirement income, private saving is essential.’

Many will welcome the chance to work past retirement age, and increased longevity means they are more than able to, but that should be a choice rather than a necessity.