Pensioners of tomorrow risk staggering £68k shortfall as they underestimate cost of retirement

Pensioners of tomorrow risk a shortfall of more than £68,000 over the course of their retirement as one in three (33%) middle-aged Brits expect to survive solely on their state pension, new research from Nationwide Building Society shows.

Based on today’s pensioner spending habits, those retiring in future could beclose to £400 out of pocket each month due to a gap between expectations and reality.  This significant miscalculation could prove to be a major setback to tomorrow’s pensioners enjoying their later life – forcing them to abandon plans for travelling, moving home or supporting their children and grandchildren. The shortfall would be enough to enjoy a round-the-world cruise for two, buy a new car, build a conservatory and gift the grandchildren a deposit for their first home.

Nationwide, which polled more than 1,000 people aged 40 to 60, commissioned the research to better understand the issues people face when it comes to giving up work, particularly as final salary pensions continue to decline and life expectancy continues to rise. Britain’s biggest building society is currently looking at how it can better serve those approaching or already in retirement by helping them access their money in different ways.

The research shows that just four in ten (40%) people in middle age have a private pension in place. It also highlights that more than half (52%) of people aged 40 to 60 are worried about affording retirement, with four in ten (43%) not believing they will be able to afford the lifestyle they want when they finish work.

Pension shortfall

Those in their middle age expect their monthly shortfall in retirement to reach an average of £208. This equates to £37,440 when taking into consideration the current retirement age and average life expectancy.

However, the reality is that their shortfall could be around twice as high, with the poll highlighting that the average retiree receives £505 a month in state pension but requires £885 a month to live on – £616 for essential bills and £269 discretionary spending4. For those without an additional pension to take them beyond the basic state allowance, this leaves a shortfall of £380 a month, or £4,560 a year. This means tomorrow’s pensioners may need to tighten their belts and hunker down in retirement - a time they want to be enjoying life and supporting their family. In an average 15-year retirement the shortfall would amount to £68,4005, well over twice the average £27,000 annual salary.

Pension Inertia

Despite retirement being on the horizon, just nine per cent of those aged between 40 and 60 have set clear retirement goals, while more than half (54%) are completely unprepared, with no idea how much is in their pension pot (44% for those aged 55-60). More than a third (37%) don’t know what their retirement income will be.

Saving towards retirement is a struggle for many, with close to half (49%) of those surveyed saying they are struggling to save because of limited disposable income (26%), while more than one in five (23%) say the cost of living puts them off. A further 16 per cent say debt is prohibitive to saving.

What Retirement?

This lack of planning means that close to three in ten (29%) believe they will have to work as long as possible in order to fund their retirement, while close to six in ten (57%) said they plan to ‘unretire’ if they find themselves financially stretched.

Home Help

The survey shows that those in middle age have an average of £125,350 equity currently in their home but would try and find other ways to survive before tapping into their property wealth. Around a third (32%) see accessing equity in their property as a last resort, while more than a fifth (28%) don’t want to leave any debt to their family. A quarter (24%) wouldn’t know who to approach if they needed advice on their retirement.

Jason Hurwood, Nationwide’s Director of Home Propositions, said: “We are living longer and need more money to keep us going. The reality is that without adequate income, and potentially living a third of our lives in retirement, older people risk missing out at a time in life when they want to relax and enjoy themselves. As an industry we really need to do more to help people access their money in later life and it is something we are continuing to explore.

“Options should be varied; we can’t presume releasing equity in the home is the solution for all older people with limited income, despite healthy average levels of equity. There needs to be more education and support so that people can take charge of their own futures and pick the option that is right for them and their circumstances. Recalibrating the relationship between our money, our expectations and our assets is key to unlocking a retirement that is comfortable.”