Pension savers have an unrealistic view of how much they really need to save to meet their expectations for retirement, according to new research.
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Retirement savers aged between 25 and 34 told research by investment managers Black Rock that they would like an income of £54,000 when they give up work – and believed a pension fund of £375,500 would give them this return.
However, according to the financial firm, they would really need a fund of just over £1 million to pay a retirement income at this level.
Around half of these hopeful young savers also told the firm that they had not yet started saving for retirement and 60% were worried about running out of cash once they had retired.
Spokesman Alex Hoctor-Duncan explained young retirement savers still had plenty of time to start saving, but need to have more realistic expectations of how much their money would buy in later years.
Short term view
“Not only have most of these youngsters not started saving, they have their money tied up in cash deposits,” he said. “This means they are not receiving a good return due to low interest rates, tax and inflation eroding the money they have saved.”
Many young savers also seem to have short-term financial goals rather than a plan for retirement.
If they want a retirement income of £54,000, they will need to work into their 90s at their current rate of savings, explained Hoctor-Duncan.
They also told researchers they were saving for a rainy day or luxury holidays.
Instead of short-term cash saving, the firm suggests retirement savers need to consider the benefits of tax-efficient investments that generate higher returns.
Maximising retirement income
“They should not move all their money, as cash and bonds may be generating low returns but also come with a low investment risk,” said Hoctor-Duncan. “But putting some of that cash into investments that give a higher yield even if they carry more risk is well worth considering.
“If they don’t, they have no chance of reaching their aspirational retirement income.”
So what should retirement savers do to maximise their retirement income?
The lessons, according to the financial firm are clear.
“Start saving earlier, save as much as you can, pay down debt, think long-term and keep an eye on how investments are performing in case money needs shifting around for a better return,” said Hoctor-Duncan.
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