Figures suggest that workers nearing retirement could find they’re facing a significant income shortfall later in life. Understanding how your pension savings will add up before you retire is crucial for creating long-term financial wellbeing.
According to a report from the British institution the Social Market Foundation, people approaching retirement in the UK are facing a pension shortfall of almost £250,000 if they want to achieve their desired income. In our experience at Black Swan Capital, this is exacerbated for expats in Europe.
One of the reasons for the gap is that many 50- to 64-year-olds don’t know how much they need in their pension. Only a third of those nearing retirement have an accurate idea of how much they need to save to reach their goal income. As a result, two-thirds could face an unexpected gap when they reach retirement or may not notice the gap until they’ve already started depleting their savings.
Not recognising a pension gap until you retire could mean you need to scale back the lifestyle you’ve been looking forward to and working towards. If you don’t realise there’s a gap and start withdrawing a higher income than is sustainable, you could run out of money.
It can be worse for expats
One of the issues expats and internationally mobile professionals face is they are more exposed to pension gaps. This occurs when you move from one country to another and have periods of time when you are not receiving and accruing pension contributions. A decade of no pension additions can have a profound impact on your quality of life when it comes to retirement.
The challenge of aligning your savings with your income
Retirement and pension systems can be widely different across countries. They can differ in how the pension assets are managed, when you can access them, and how you can access your pension. Personal and employer pension assets in some countries allow you access to some of the capital, whereas in other countries, like Germany and the Netherlands, you are much more restricted and may be limited to only purchasing an annuity income stream.
A key challenge then in managing your various pensions across the world, is translating how your contributions will result in an income that meets your expectations.
It’s more important than ever that workers understand how their contributions are adding up and what it will mean for their retirement.
42% of people nearing retirement have no idea what income they will need.
To be able to understand whether you’re saving enough through a pension, or through your own personal investment plan, you need to understand what income you want in retirement.
Despite this, 42% of people nearing retirement said they have no idea what income they will need to achieve their goals.
Many people find that their essential expenses are lower in retirement than when they were working. This may be because you may have paid off your mortgage or have fewer travel expenses. A rule of thumb is that you need two-thirds of your current income to maintain your lifestyle in retirement. This is a good starting place but there can be huge differences in what income retirees need. It will depend on your personal circumstances, so it’s important to take a closer look at your expenses.
There are two other important factors to consider:
- Inflation: The cost of living creeps up each year, and 25 years into your retirement, it may well cost twice as much to live as when you first stopped working. You need to make sure your retirement plan can account for this.
- Aged care costs: In your later retirement years you may find your regular costs increase in line with medical and other care needs. Having sufficient retirement reserves can be essential for maintaining quality of life and care.
As well as regular discretionary spending, you may have larger one-off costs that you need to factor in, such as updating your home or an extended holiday.
What is “enough” when you’re saving for your retirement?
As an expat, it is important to build flexibility into your plan to create an income that suits your needs and the lifestyle you want when you retire. Yet, 16% of people don’t understand what their options are, while 40% aren’t confident about securing the income they need.
This is something financial planning can help you with.
We’ll work with you to understand how much you need to save into your pension to retire when you’re ready and deliver an income for the rest of your life. It means you can look forward to retirement knowing that you’re taking the necessary steps now.
We’ll also help you understand what your options are. From a flexible income to a guaranteed income through an annuity, the decisions you make about how to access your pension should complement your wider plans and priorities.
The sooner you review your retirement planning needs, the more likely you are to reach your goals and have an opportunity to close gaps if you find them.
To arrange a personal financial plan review that can give you confidence about the future, please contact us at [email protected].