Just how much should someone save into a pension to gather enough money to pay for a comfortable retirement?
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That’s the question that puzzles many retirement savers who reach the end of their working life and find that their pot of gold is too small to fund the lifestyle they desire for their later years.
Now, a study by international investment managers Schroders suggests 15% of earnings for 40 years is the optimum pension saving.
The figures come from an international report that analysed pension savings around the world.
Pension realities
The report drew three main conclusions –
- Anyone who wants a pension that matches around two-thirds of their final salary needs to make the 15% contribution.
The study also found that pensions work the best when employers and employees contribute together to share the burden
- Pension saving should be compulsory.
If putting money aside is optional, savers are side tracked by lifestyle and family events. They tend to buy a bigger car, go on more expensive holidays and splash the cash on fripperies that give no return.
The technical term is inertia, but what financial advisers really mean is retirement savers only earn their money once and have the choice of spending, saving or a mixture of the two. Given the choice, most would spend now and worry about retirement when they get there.
- Look at real returns, not relative ones
Pension funds need to run at least 3% above inflation to give a decent return, said Lesley-Ann Morgan, the firm’s head of global strategic solutions.
“In the end you cannot eat relative returns,” she said. “Only actual returns count and erring on the wrong side of caution can leave a big hole in someone’s retirement savings.”
Complications and options
The paper aims to give companies and employees a starting point to consider the level of funding and investment objectives of defined contribution pensions, but the same rules apply to personal pensions.
The company looked at schemes across the US, Canada, Europe and Australia.
One focus point was the compulsory Australian superannuation plan, where the government is considering raising the level of contributions from 12% because they are considered inadequate for funding in retirement.
“The list of pension complications and options is endless,” said Morgan. “But many of the solutions are out there and are related to underfunding. People just have to accept they have to save more throughout their working life and cannot leave their retirement to chance.”
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