Research shows pension planning could increase your future wealth by 20%

You might wonder why it’s worth dedicating time and space to planning your retirement, particularly if you’re early on in your career. The answer is simple: it will improve your financial situation down the line. 

A pioneering study by Annamaria Lusardi, one of the world’s leading financial experts, who served as a consultant to former US president Barack Obama, has measured the value of thinking about your future. 

The study shows that when people attend “retirement seminars” and spend time thinking about their future, they can improve their future wealth by 20.3%. This is, largely, because having clarity about your future and implementing sound financial planning helps you make the right decisions as you go. 

According to the Office for National Statistics, the median household disposable income is around £31,400. This means that, if we rely on the estimates of the study, the increase in wealth could be over £6,000 on average, or the equivalent of around £500 a month. Are you ready to make the most of your wealth? Read on to find out how. 

Your pension is your livelihood

It’s important to understand just how impactful your pension will be on your standard of living when you retire. It also accounts for a huge percentage of your life. According to the ONS, life expectancy after 65 is, on average, over 20 years; 19.7 for men and 22 for women. This is only likely to grow. 

Cast your mind back 20 years. Think about how much you can do and achieve in that time. Particularly in retirement, this is an enormous chunk of time to savour and enjoy life without work. That’s how important pension planning can be. 

The demographic pressure

Thinking about your pension is more relevant today than ever, thanks to some key dynamics that are out of our control. The demographic balance in the UK, much like many other OECD countries, is increasingly unstable. The next generation are and will be less and less able to support future retirees. This is why the basic pension from the state is and will remain limited. 

Here are some factors affecting the balance:

Fertility

For a population to be numerically stable, each couple of childbearing age should have at least 2 children. According to the ONS, since 1983, the fertility rate in England and Wales has fallen well below that threshold and now sits at 1.61. Together with 2020 (1.58), these are the lowest figures in history. We were at 1.65 in 2019, so it’s a trend that is independent of the pandemic. Fewer children today means fewer workers tomorrow and therefore less wealth to redistribute through the elderly via the pension fund. 

The ratio of workers to retirees

According to the OECD, in 1950 there were 17.9 people over 65 for every 100 people of working age. 70 years later, in 2020, that number practically doubled, with 32 people over 65 for every 100 people of working age. 

The forecasts are clear; in less than 30 years, by 2050, we’ll be at 47.1 retirees per 100 workers. This grows to 55.1 by 2080. Soon, for every two people of working age there will be one retiree over the age of 65. This is why the sustainability of the public system is a pressing concern. It is, therefore, more important that citizens themselves think about building resources for their own peace of mind. 

Pension expenditure trends

In 1990, the UK spent 4.5% of its GDP on state pensions, according to the OECD. Today, this figure is around 7.7% and, over the next few decades, the number will grow to over 8%. This may seem a relatively small increase, but one percent of GDP equates to about £22 billion. The room for maneuvre when it comes to state expenditure on pensions will shrink as the demographic shifts make an impact. 

These factors demonstrate the difference that demographic, and therefore economic, imbalances can have on the public purse. This is why every citizen is going to increasingly have to become the architect of their own retirement, through careful planning of resources and a clear vision of how they want their post-work life to look. 

The first step in assessing the economic viability of our retirement plan is to evaluate the resources we can count on. This starts with the state pension. 

For the average person, the standard state pension can guarantee a pension equal to 49% of their gross income. For those with less than average incomes, the state pension can equate to around 70% of the salary. For those with double the average income, however, the state pension only covers around 38%. This is why, for those with grand designs for retirement, it’s important to supplement the basic pension. 

If you want to project your own retirement savings and calculate how much you need to be putting away, you can use the Moneyfarm Pension Calculator. This will show you how much you’ll be getting from the state and how much you need to top that up to have the retirement pot you need. 

To bridge this gap, either you need to up your contributions to your workplace pension or open a private pension solution like a SIPP. In either case, the earlier you start saving, the better. The best weapon in your arsenal when planning for retirement is time. The sooner you start, the less you’ll have to put away each month to achieve your goals. Let’s look at some examples. 

Let’s imagine you can put aside £100 a month for retirement, up to the age of 63 (the current average effective retirement age). How much would this change if you waited five years to start saving? And what if you started five years earlier? 

According to our calculations, a 40-year-old who started saving today could end up with a supplementary income in retirement of £110. If they postponed their saving by five years, this would drop to £80. On the other hand, if they were a careful planner and started five years ago, they could have an extra £146 per month. This is a difference of 83%, almost double. These differences can have a huge impact on your quality of life in retirement. 

Investment is associated with risk and the value of what you invest can go down as well as up, but these numbers are purely intended to illustrate that starting to think about your pension early can increase your chances of doing well.