In the past year, households across the globe have faced an uphill battle in balancing their budgets, with half of the world’s consumers witnessing a decline in disposable income due to the turbulence in the global economy.
The combination of surging expenses and inflation has dealt a severe blow to people’s ability to maintain their pension contributions.
The struggle to strike a balance between immediate needs and long-term savings has become an increasingly challenging juggling act, particularly for younger generations burdened with student debts, low entry-level wages, and the soaring cost of living.
As a result, the majority of individuals find it increasingly difficult to allocate a significant portion of their income towards retirement savings, raising concerns about a potential pensions saving crisis.
Are people saving enough?
According to the latest research by the Pensions and Lifetime Savings Association, to achieve a ‘moderate’ living standard after retirement, couples need an income of approximately £34,000 before taxes, while singles require around £23,300. As the cost of living continues to rise and financial uncertainties loom on the horizon, the question arises: Are people saving enough to sustain their desired lifestyle in retirement?
To match the living standards of today, pension savings need to be substantially higher. However, due to diminishing disposable incomes and the relentless increase in the cost of living, this goal seems increasingly unattainable. The Retirement Shortfall Report reveals that the average worker will face a staggering shortfall of £115,768 if they rely solely on their pension pot for retirement income.
The implications of these challenges are dire for future pensioners. Unless significant changes are made, a retirement crisis could be on the horizon, with many retirees facing the prospect of poverty.
The Connection between Spending Habits and Retirement Savings
Analysis of the Office for National Statistics’ Family Spending data for 2023 shows that the average UK household budget is approximately £2,700 per month (£32,655 per year). However, this figure can vary significantly based on location, household size, and lifestyle choices. While spending is essential for daily living, unchecked habits can significantly impact the potential for retirement savings.
Considering inflation as the primary driver of future cost changes, an average inflation rate of 8.6% is currently affecting the UK. Applying this inflation rate to each spending category indicates that annual household costs could soar by over £16,000 in just five years.
As costs continue to rise and disposable income diminishes, individuals find it increasingly challenging to save for important financial goals, such as pension contributions. According to the FMCG & Retail 2023 Whitepaper, disposable income in the UK has decreased by a staggering 65% in the last 12 months due to high inflation.
Are We Saving Enough for Retirement?
Recent data analysis reveals significant variations in financial habits and wealth accumulation among different age groups in the UK. The analysis sheds light on the saving behaviors of various demographics, highlighting some striking patterns.
For instance, a 22-year-old is currently saving an average of £52.21 per month towards their pension, with a total savings of £960.31. However, according to calculations from Penfold’s pension savings calculator, they should be contributing around £169 per month to meet their retirement goals, indicating a shortfall of £116.79.
Similarly, a 35-year-old is contributing £146.84 per month on average, with total savings of £4,174.16. Yet, the recommended savings according to Penfold’s calculator are approximately £431 per month, signalling a shortfall of £285.
As for 45-year-olds, they are saving £335.12 per month on average, amassing total savings of £8,371.25. However, to reach their retirement goals, they should be saving approximately £814 per month, resulting in a shortfall of £479.
These examples demonstrate the importance of regularly reviewing and adjusting pension contributions to ensure financial security in retirement. However, with less disposable income impacting every age group, achieving these savings goals becomes even more challenging.
Striving for Realistic Retirement Goals
Attaining a comfortable retirement involves setting realistic saving goals throughout one’s working years. While achieving these goals can be challenging due to various factors such as financial commitments, compound interest expenditures, debts, and the rising cost of living, strategic saving, wise investing, and prudent expenditure control can make them attainable.
Striking the Right Balance: Retirement Savings and Quality of Life
The notion of a ‘comfortable’ retirement varies from person to person, but it generally entails having sufficient income to meet basic needs, with some extra for hobbies, travel, and leisure activities. To lead such a lifestyle, estimates suggest an annual income of £19,000 for an individual or £26,000 for a couple. A more luxurious retirement, with provisions for extravagant trips and high-end purchases, would require an annual income of £31,000 for an individual or £41,000 for a couple.
However, securing these income levels in retirement demands substantial savings. For instance, to achieve an annual income of £41,000, one would need a pension pot worth £757,000. Alternatively, an income drawdown approach would require savings of £442,020 to maintain the same lifestyle, albeit with greater risk due to the lack of a guaranteed income.
Pete Hykin, CEO and Co-Founder at Penfold, a workplace pension provider, has expressed deep concern over the situation, stating that the UK is potentially heading towards a retirement crisis. The challenge of balancing immediate necessities with future financial stability has never been more daunting. The hurdles of student debt, low wages, and high living costs are weighing heavily on the younger generations, while everyone, regardless of age, grapples with the diminishing ability to save substantially for retirement.
The gaping disparity between necessary retirement savings and actual savings is alarming. Unless substantial changes are made to tackle the decreasing disposable incomes and soaring living costs, saving enough for retirement could become nearly impossible for many individuals.
Amelia Brand is the Editor for HRreview, and host of the HR in Review podcast series. With a Master’s degree in Legal and Political Theory, her particular interests within HR include employment law, DE&I, and wellbeing within the workplace. Prior to working with HRreview, Amelia was Sub-Editor of a magazine, and Editor of the Environmental Justice Project at University College London, writing and overseeing articles into UCL’s weekly newsletter. Her previous academic work has focused on philosophy, politics and law, with a special focus on how artificial intelligence will feature in the future.
