A sticker price is something that everyone can understand – we’re used to seeing them in all aspects of our lives, from everyday shopping in the market to buying a new home. So, when it comes to understanding the cost of a particular lifestyle in retirement, it can be a very useful way to focus on where you are now, and where you need to get to.
In our Spring events for advisers this year, we explored the concept of sticker price retirements, from Elite to Standard. We followed this up in August with a webinar (you can catch the recording here).
What do we mean by ‘standard’?
With a standard retirement, a couple aim to be no less worse off than the middling UK household who are still working. They may in fact have a relative edge in terms of lifestyle over their neighbours still going out to work, as they are now free from the cost of commuting and raising a family. Then again, most people want to have fun in retirement, so they may want to keep up with the Joneses.
The latest ONS data on UK Household Income for the financial year ending 2019 was released in July which shows that retired households are doing relatively well (Figure 1 below).
The data shows that median disposable household income is £29,400, up 1.4% on 2018 after accounting for inflation. If a household has two members and their income is equal, that would suggest a total pre-tax income of around £30,500. We used £31,000 in our modelling.
A couple in their 40s will see that their State Pension expectation at 67 is £168.80 a week, or £8,777.60 a year - up from £8,546.20 last financial year. If they are aiming for a standard retirement and both looking forward to a full State Pension, they will still need to generate an income of £13,500 a year from drawdown.
Our estimate, using actuarial and capital markets data from independent consultancy Hymans Robertson at a 75% Viability Score, found that, at the moment of retirement, a pot of £309,000 could be enough to support this ‘standard’ household retirement (with a decision to step back from risk by partially annuitising at 75).
To successfully accumulate this size of pot means looking at levels of current savings and careful consideration of the level of risk for the accumulation phase. With auto enrolment now at 8%, couples who are both earning £40,000 expecting full State Pensions may already be well on their way. Then during drawdown, a decision is needed on what risk grade to choose and what level of confidence you think advisable, what risk of failure, remembering investment does not offer complete certainty.
This is where our new Income Manager Tool (IMT) can prove particularly useful. In a few short minutes, you can have a clear view of the impact changing risk grades and savings strategies will have on the likelihood of a plan succeeding. This is presented as a Viability Score – a calculation by Hymans Robertson of the likelihood that a retirement plan will succeed.