Millennials will need to save £12,000 a year to retire at 55

16 May 2018

A 30-year-old hoping to retire at 55 will have to save around £1,000 a month (net of tax relief), according to new research by the Pension Review Service (PRS).

Putting aside £1,000 a month or £12,000 a year, it is calculated, should allow savers to accumulate a big enough pension pot to deliver an annual income of £26,000 in retirement.

While £26,000 a year in retirement income is equal to the average national wage and will provide a comfortable life, “it will not permit a particularly exotic lifestyle”, notes the PRS.

The findings underline the importance of starting retirement savings as soon as possible.

“A 30-year-old who starts putting aside £1,000 a month, increasing with inflation, could build a retirement pot of around £625,000 in (today’s money) by the time they’re 55,” says the PRS’s Mark Abley.

“If they’d started their pension pot five years earlier, they would have a pot of £668,000 at 55 – these figures assume that returns and inflation remain steady.”

However, the prospect of many classified as “millennials” being able to save anything like £1,000 a month is low. While salaries differ widely per region, industry and skill, average monthly earnings of employees between the ages of 22 and 29 is between £1,829 and £1,924, while for those in their 30s it is between £2,331 and £2,535, according to the office broking service Instant Offices. 

At the same time, the past decades of house price growth have meant many in the 20s and 30s age bracket spend a large chunk of those earnings on rent. The average millennial, according to the Landbay Rental Index, spends around a third of their monthly salary on rental accommodation.

The PRS notes that the £1,000 a month figure will not be realistic for many, but it says, “you will be surprised how even the most modest contributions can grow with tax breaks and employer contributions”.

More realistically, many in the millennial age bracket will continue working well beyond the age of 55, which is way below the state pension age, currently set at 68 for a 30-year-old. 

However, that’s not to say millennials shouldn’t be attempting to save for retirement. The PRS does note the importance of compound returns from saving earlier: “One of the keys to being able to retire at 55 is to give your pension pot as much time as possible to benefit from the effect of compound returns,” says Mr Abley. 

“It’s a complex process, but effectively by drip-feeding into the market over a sustained number of years, your pension fund will benefit from compound returns. Your original capital earns a return in the first year, in the second year both the original principal and the first years return benefit from any growth in the second year.

‘It’s very much like a snowball effect. As your capital rolls down the hill it becomes bigger and bigger. 

“Even if you start with a small snowball, given enough time, you can end up with an extremely large snowball,’ he adds.





In reply to by anonymous_stub (not verified)

The state pension is little more than a safety net - nobody should realistically aspire to rely on the state pension by itself for their retirement. The principle of investing in your own future has got to be the way forward and an occupational pension scheme, part funded by the employer and part funded by the employee, makes the most sense, especially with tax relief on the employee's contributions. However, such tax relief needs to be capped so that it is not exploited by wealthy people as a government assisted savings scheme for them. Payments by employees into pension schemes must be realistic and affordable. The earlier one starts, the easier it is to spread the investment over the longest term whilst employed to fund future pension needs. The problem for those just starting their careers is the other pressures on their current finances, perhaps a student loan to pay off - and saving for a deposit to buy a house, as well as everyday living costs. For these people, paying into a pension scheme is hardly high priority in their view, but making a start now, will reduce regrets later in life. Perhaps a scheme with lower percentage payments in the early years would work - and then increase the amount as they move up the salary scale.

In reply to by anonymous_stub (not verified)

I really wish people would get realistic over 'average wages'. I hardly know anyone unless at management level who earns the so called average. The rest of us are on nowhere near what is claimed here. It's about time an average was done on the lower earning brackets and then comment on who can afford 12k in pension payments a year! For God's sake a lot don't even earn 12k a year ket anyone put it in a pension. Are the people who create these figures live in cookoo land or do they really think we all live with their incomes.......come on at least get the facts right. No wonder the government stick their heads in the sands when it suites and when they are preaching. They oufht to live on the real average or less like a lot do.

In reply to by anonymous_stub (not verified)

Millenennials can probably expect to live to 90 or more, so retiring at 55 is probably not realistic. A 30 year old will only be funding a pension plan for 25 years, if they expect to retire at 55 - and the fund would need to last some 35 years of retirement. The figures would be rather different if they pay in for 40 years, to age 70 and then draw their pensions for some 20 years.

In reply to by anonymous_stub (not verified)

Let them live off the state pension which they claim is too high for us pensioners and should only be allowed to draw state pension 50 years after starting full time employment and contributing like we have had to. They will have to learn how to cut back to basics like we have, wish I could still be here just to see them suffering.

Add new comment