We hear it time and time again…we’re not saving enough for retirement.
The most common objection to not saving for your retirement? "The state will look after me".
And yes, the state will offer some support to a certain extent. But bear in mind, the UK has one of the lowest state pensions in the developed world.
So, let’s take a look at what sort of lifestyle you would have if you retired with just the new state pension.
A common retirement scenario
1) You (and your partner) have paid 35 years of national insurance contributions
2) This gives you the maximum new state pension of £10,600 a year
3) You own your home i.e. you have no mortgage payments to make
4) At the start of your retirement, you’re living with your partner
5) You live in a 3 bedroom house
6) You have a car
7) You have over £1000 of savings.
As a couple, your total state pension, if you both have 35 years of national insurance contributions, could be as much as £21,200 a year
Given we’re used to spending on a monthly basis, we’re going to work on a pension income per person of £883.33 a month.
We’ll double that to £1766.66 which gives you your household income (state pension) for a retired couple. Assuming you have no other income, then your individual state pensions of £10,600 a year will be tax-free. This is because you can earn up to £12,570 per tax year without paying tax.
Let’s start with your basic living costs.
This is just a ballpark based on average expenditure statistics.
Some of these will be a fixed cost - like council tax or energy bills. Others you could ditch – the mobile phone and broadband, for example. It depends if you class these as essential.
But I’m trying to be as generous as possible. Again, the food shop budget equates to just under £80 a week for two people. You might need less. It depends if you’re more Aldi over Waitrose. But you’ll need to be savvy in retirement – shopping around for the best deals for things like gas and electric and broadband.
Its good to budget a bit more for things like gas, electric and water simply because you’ll probably be spending much more time at home than you do now.
The average cost of car insurance for somebody between 65-75 is around £500 a year. While a service and breakdown cover are not compulsory, they are highly recommended. So I’m adding these in.
I’ve not included anything in the budget for repairs yet. But we may come back to that later.
So, we’ve spent nearly half of our budget on the essentials plus some very common bills.
Let’s see what else we need to consider
Additional non-essential ‘essentials’
I’m throwing in £100 a month (£50 each) for clothing. This should be enough for one or two items a month, depending on the time of year. But you could allocate less.
Don’t forget buildings and contents insurance. Let’s call that £40 a month
So our total so far comes to £1092.25
Which leaves us £674.41 to play with.
You now need to think about things you specifically to spend your money on.
Think about these 3 areas that people like to spend money on:
Going to restaurants and cafes
Leisure activities e.g. going to the gym, cinema, hobby clubs
Holidays and day trips
Subscriptions for things like TV or Music.
Are you spending lots of money on these things at the moment? Would you be willing to cut back when you retire?
One off costs
Don’t forget about things like birthday and Xmas presents plus other little gifts here and there.
These costs can really add up if you don’t budget for them. So think about how often and how much you’ll need to spend.
You might also need to think about dental treatment, which, contrary to popular belief, is not free for retired people. And even though you can get free treatment and prescriptions on the NHS, you might also want to consider a health insurance policy if you’re worried about long delays for treatment.
Making use of a rainy-day fund
In our example, we have a savings buffer of over £1000 to fall back on.
Remember we didn’t factor in car repairs? You could choose to use any savings for these costs. But what about other costs? Broken appliances can be costly. If you have relevant insurance, this might help. But insurance companies are notorious for targeting retired people with every insurance product under the sun. So be careful you don’t just take insurance for the sake of it.
You could be better putting aside a small amount each month to boost your savings, giving you more to rely on when you get an unexpected bill.
So, using our example, can you live on the new state pension?
Yes. Looking at the essential bills, a joint state pension income should cover your basic needs if you don’t have any mortgage or rental costs.
As for what’s left over, this depends on what you want to do with your time.
I know people in this situation who are happy living a fairly modest lifestyle. Their pension pays their bills, they spend a little bit on hobbies, a few trips to restaurants and day trips. And generally keep themselves entertained without wanting to spend much.
If you want to do more things with your time that cost money, it then means making choices with the money you have available.
But retirement, despite the old saying ‘life is short’, can be a long part of your life if you retire as soon as your state pension is available. And there may be times when you'll want a bit more money.
What if I live alone?
Living alone does make things more expensive. And that’s true at any point in your life. Certain bills can no longer be split between two people. So a single income has to stretch much further.
Let’s do a quick recalculation:
Suddenly, our single income of £883.33 a month has almost disappeared.
We’ve got just £211 a month for fun money.
You’re in a situation where you have to start thinking about whether you need everything you’re paying for. For example:
Do you need your car?
Can you cut back on your food bill?
Do you need the internet?
And if you start retirement living with your partner, at some point (and I hate to be morbid), but one of you will be left alone eventually. You may be able to inherit some of your partners state pension but it’s not a guarantee. In the official words of the government, you ‘might’ inherit some of their state pension.
What if I don’t own my home?
Whether you live alone or with a partner, if you still have to pay mortgage costs or rent your home, this is where the state pension will almost certainly fall short.
If you (and your partner) are retired then you can claim additional money through housing benefit.
It’s not a fixed amount so will be assessed on your individual circumstances. So whether or not you a) receive anything or b) receive the full amount to cover your cost, is never guaranteed. So relying on the government to pay for your housing should never be assumed.
My personal feeling on the state pension is that, as a starting point, it’s a very useful sum of money to cover your essential bills. Other people in the financial space seem to think it’s foolish to rely on it and that you should plan to not need it.
If you get the full new state pension, that's £10,600 a year. This will increase under the 'triple lock' rule every tax year.
Living with another retired person certainly gives you a bit more breathing space. As we know throughout our lives, the ‘single person living premium’ is a real thing.
I believe we should all be making plans to secure additional income to get us through retirement.
You might have seen pension calculators online. To be honest, I find them pretty scary. They are very generic and do nothing but tell you you’re probably not going to have the money it thinks you need to live comfortably at retirement.
So really think about how you want to live your life during retirement. Think about what you’re doing now that you would still want to do. Think about new things you’d like to do when you have more free time.
And then have a go at doing your own retirement budget using my example in this article.