I get asked a lot about what sort of income an investor can expect to receive from their Pension, or what their Pension should be worth in order to give them a good income in retirement.
In my experience, in conversation anyway, people generally underestimate how long they are going to live and underestimate how much money they need to live comfortably. Both of these are relevant if you want a nice comfortable income in retirement that will allow you to enjoy the lifestyle you are no doubt looking forward to.
Underestimating how long you will live
Firstly, underestimating how long you might live. That is important because if you think you are not going to live beyond 80 for example, then the temptation is to spend capital rather than income. By spending the money that generates the income starts to become a problem from day one, because you are reducing the amount of money that is there to generate an income for you. So you get into a cycle of needing more capital and generating less income, eventually leaving you with no money. So it is better to plan to live only off income if you can.
Underestimating how much you need
This is really a case of simple maths. Retirement planning, pensions, saving, investing, they all distract you from the main goal, which is to work out:
1. How much income do I need in retirement?
2. What size of Pension will give me that?
If we use really simple numbers and say that you earn 5% income on any given pot of money then we can start to consider numbers like:
£100,000 will give me £5,000 annual income
£200,000 will give me £10,000 annual income
£500,000 will give me £25,000 annual income
£1,000,000 will give me £50,000 annual income
Now for most people in the UK, knowing what the average pension pot is in this country, even getting to £100,000 of Pension savings might be an ask. But realistically is £5,000 a year (using the above example) enough for you to live off, after including State Pension and any others you might have?
I understand why people don’t like thinking about this stuff but believe me, it is not going to go away. The only way to feel great about retirement and look forward to it is by planning ahead and investing wisely.