The ABC of saving for retirement

Will you have enough? We give advice on what to do and how to avoid pitfalls.

The difficulty is that retirement savings nowadays are almost always shown as a lump sum. But how do you know what that will represent in future income?

How do you know what income you’ll get at retirement and whether it will be enough? It’s not easy to answer. First, you must work out how much you’ll need based on what you currently spend. Then, work out how much of an income you’re able to earn from the money you’ve saved and whether it’s enough to cover that need.

The difficulty is that retirement savings are almost always shown as a lump sum. How do you know what that represents in future income?

According to Liberty’s Mark Lapedus, this is currently one of the biggest issues with retirement savings.

“Back when everyone received a pension from their employers, they would get 70% or 80% of their final salary. Everything was calculated in terms of income. But over time, we have lost that focus.”

With the move from defined benefit to defined contribution funds, people are in charge of their own retirement savings. And they concentrate almost entirely on the capital they’re building up. But how do they know what it’s really worth in terms of a monthly income?

What makes this even more challenging is that there’s no easy set of rules you can use to work out how much income you can get from a certain amount of capital. There are a lot of variables at play.

“Most people will be putting away a certain amount of money every month, assume it’s going to grow at a certain rate and calculate that when they get to retirement they will have a certain lump sum,” says Lapedus.

“But how are they deciding what that lump sum will be worth?”

If you intend to use your money to buy a guaranteed annuity, what rates are you using?

“You can work off what is being offered by insurers today, but annuity rates may be significantly different by the time you reach retirement.

“Since interest rates fluctuate and because life expectancy will change, you can’t accurately predict what life insurers will offer you.”

Even if you decide to use an investment-linked living annuity, you face the problem of not knowing what’ll happen in the markets.

You don’t know what returns will be like or what will be a sustainable drawdown percentage in the future. And the further you are from retirement, the less certainty you have.

One way to mitigate this is to consider retirement saving options that don’t just accumulate a lump sum, but rather guarantee a future income.

These products remove these variables.

There are products that remove the variables.