What Does a Comfortable Retirement Look Like? The Numbers You Need to Know

Retirement is something that we all look forward to. It is the time in our lives when we can enjoy the fruits of our labour, relax, travel and spend time with loved ones. However, without proper preparation, retirement can become a time of financial hardship and worry. In this article, we will discuss retirement income, how it compares to average earnings, and what you can do to prepare for a comfortable retirement.

Average Retirement Income vs. Average Earnings

It’s interesting to see how much disposable income the average pensioner today receives, in comparison to the average worker. According to a study by the Office for National Statistics (ONS), the average UK earnings – before tax or housing costs – are £30,420. After income tax, National Insurance and 5 per cent pension contributions (the recommended minimum), this is reduced to £23,111. On the face of it, this is about 50 per cent more than average retirement income.

However, this does not factor in housing costs. The average UK mortgage payment is £669 per month or £8,028 per year. If this is deducted from the average net income, the result is £15,083.

By a striking coincidence, it appears from these figures that average net income is almost exactly the same for today’s retired generation as it is for today’s working generations. This is clearly in large part due to the high cost of housing. While the retired generation may largely own their own homes outright, and have no further mortgage payments to make, the working generation is spending a large chunk of its higher income on putting a roof over its head. Consequently, net income seems to balance out to within £3 a year. It really is that close.

Is the Average Retirement Income Different for Couples?

Couples tend to have more retirement income than single people. Some reports even suggest that in 2017/18, retired couples received more than twice the income of single retirees. This may partly be due to the fact that housing costs were included in the study – couples sharing housing will generally have lower overheads than someone on their own.

Another factor may be that those who are single upon entering retirement are likely to be divorced or separated, which may have had a significant impact on their past finances and thus their ability to save for retirement. People in long-term stable relationships may have a greater capacity for building up retirement funds, as well as a stronger motivation for doing so.

Can You Live Comfortably on the Average Retirement Income in 2020?

As the comparison above shows, the average retired income may not be much different – in terms of disposable income – than that of the average wage earner. But this doesn’t necessarily mean that such an income provides a comfortable or desired standard of living (since many wage earners still consider themselves to be struggling or ‘just getting by’).

So what makes a ‘comfortable’ retirement income? Ultimately it depends on how you want to spend your retirement. Research suggests that a couple in the UK need an annual combined income of £47,500 to have a retirement with few or no money worries, while a single person would need £33,000. This estimate assumes a lifestyle that includes:

  • Three weeks’ holiday in Europe (per year)
  • Food shops costing £56 per person per week
  • £1,500 worth of clothes per person annually

These assumptions aren’t extravagant, but they aren’t penny-pinching either. So if you see yourself living more modestly – e.g. shorter UK-based holidays, cheaper food shops and fewer new clothes, you could get by on much less. Research suggests that an annual income of £10,200 per person is enough for a frugal retirement – but any less might mean making some big sacrifices. While frugality can be a virtue, it’s important to strike a balance and consider what kind of retirement lifestyle would be most fulfilling for you. It’s also important to remember that unexpected expenses can arise in retirement, such as medical bills or home repairs. Having a bit of a financial buffer can give you peace of mind and flexibility to handle these expenses without stress.

One way to increase your retirement income is to continue working part-time or freelance, either in the same field or pursuing a passion project. This can provide additional income and also help you stay engaged and active in retirement. Another option is to downsize your living situation or move to a location with lower living costs.

In addition to personal savings, it’s important to consider other sources of retirement income. The state pension is a key source of income for many retirees in the UK. The full basic state pension in 2020 is £134.25 per week, or just under £7,000 per year. To qualify for the full state pension, you need to have 35 qualifying years of National Insurance contributions. If you have less than 35 years, you will receive a reduced amount. The state pension age is set to rise in the future, so it’s important to keep up-to-date with any changes.

Private pensions, whether through a workplace scheme or a personal pension, are another important source of retirement income. If you have a workplace pension, your employer may match your contributions up to a certain amount, which can be a valuable benefit. If you’re self-employed or don’t have access to a workplace pension, setting up a personal pension can be a good option. There are many different types of personal pensions available, so it’s important to do your research and consider your individual needs.

Investments can also be a way to increase your retirement income. Investing in stocks, bonds, and other assets can provide a higher potential return than savings accounts or fixed-rate bonds, but also comes with greater risk. It’s important to seek professional financial advice and carefully consider your risk tolerance before investing.

It’s never too early or too late to start saving for retirement. Even small contributions can add up over time, thanks to the power of compound interest. Starting early gives your savings more time to grow, but it’s never too late to start making contributions. Every pound you save is a step towards a more secure retirement.

In conclusion, the average retirement income in the UK is comparable to average earnings, but it’s important to consider individual circumstances and needs when planning for retirement. A comfortable retirement income depends on factors such as lifestyle, location, and unexpected expenses, and can vary widely between individuals. Building a retirement fund through personal savings, workplace or personal pensions, and investments can provide financial security and flexibility in retirement. Seeking professional financial advice can help you make the most of your retirement savings and ensure a fulfilling and comfortable retirement.

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