Think of a number and multiply it by 25. Thats a rough guide to the cost of an inflation linked pension. For a woman in her mid sixties, or a man a couple of years younger. So £10 000 pension will cost you £250 000.
Or if you want to retire on two-thirds of your salary, then multiply your salary by 17. That's how much you will need to save.
So what does it take to save an amount equal to 17x your salary? There's a lot of variables here - but it shouldn't put you off working out a ball park figure.
Let start by assuming you save two months of your salary, every year for forty years. And your salary stays fixed in real terms. Take real annual growth as between 1-4%: 1% definitely, 2.5% probably, or 4% possibly (with a lot of your savings in riskier shares).
What do you end up with?
Amount of salary saved after 40 years with growth of
1% 2.5% 4%
8x 11x 16x
So despite continual real growth of 4% for forty years and saving two months salary every year, you still come up short. Just.
Let's up the amount of savings to three months a year.
1% 2.5% 4%
12x 17x 24x
And suddenly we are there, even with only medium growth. With the high returns (4%) you can practically retire on a pension equal to your salary. (It will certainly feel like it, because you won't be saving 25% of your income any more)
But who saves three months money every year?
Shouldn't the government do something? Well they have - they have set the contributions level for the new default pension scheme (now called Nest) at around one months salary [employees pay half of it].
How much would that give you?
1% 2.5% 4%
4x 5.5x 8x
Saving one month's salary a year isn't enough. But the government obviously sees this as a glass half full. Tell people they need to save at least double that amount and they might become too dispirited to even try.
