Why life really is cheaper after you retire
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Oldies Expeditionary Force is an important but little-remarked aspect of London mass transit. We set out after 9am from the suburbs “to go up to Town” for fun or occupation. Many of us swipe our free passes apologetically as we mingle with paying travellers. Our embarrassment is misplaced.
The spirit of the age, after all, is “own it, girlfriend”! My advice to other older beneficiaries of free or discounted travel is: fling that M&S wool blend scarf across your shoulders as if it were a vintage Hermès masterpiece. Stride or sashay up to the turnstile and flourish your pass. If a full-fee passenger raises an eyebrow, snort: “Because I’ve earned it, baby!”
Saving money is a pleasure of advancing years that is overlooked by philosophers in their trivial obsession with opportunities for transcendent contemplation. The latter matters little to retirement planning. The former is crucial. It is therefore the subject of this week’s column.
I initially doubted whether it is possible to maintain the same lifestyle in retirement at much lower cost. Successive UK governments have said it is and they have been wrong about practically everything else.
However, they have only been repeating the findings of an independent commission. In 2004, this endorsed “target replacement rates” as representing the percentage of gross working age income needed by retirees to live as well, or badly, as before.
Folks scraping by on under £15,900 a year require 84 per cent of that sum as senior citizens, according to updated official data that adjusts for inflation and housing costs. People with working-age income of over £67,000 can supposedly keep up appearances on just 53 per cent of that total in later life.
A panicky question dogs most of us when contemplating retirement: “How will I get by without any earnings?” A low target replacement rate should give higher earners some reassurance.
It is surprising how savings can mount up. The biggie is liable to be contributions to the pension funds you are now drawing on. Statisticians also assume most better-off retirees have paid off mortgages and covered the cost of raising any children.
Lower income means lower income tax. Travel may be discounted or free. Eye tests and prescriptions are also gratis. The latter is just as well — the older you get, the more minor ailments you find yourself citing during grumbling contests with peers.
The sheer irksome expense of working recedes into the past. National insurance and season ticket charges represent large savings for many. Incidental economies may include workplace-appropriate clothing (overalls if you are a plumber, a mountaineering gilet if you run a hedge fund) and sandwiches at lunchtime.
Replacement rates estimate required incomes. Another helpful set of benchmarks, the Retirement Living Standards, estimate appropriate spending. They are provided by Pensions UK, an industry body, based on extensive focus group research by Loughborough University. Every possible cost of an independent retirement is considered, down to “how many doormats people think they need,” jokes Pensions UK’s Matthew Blakstad.
The current “minimum” standard is a budget for a single person of £13,400 a year — although this estimate doesn’t include rental payments, housing benefit usually covers most of these costs for people on lower incomes. For a “moderate” designation, the budget rises to £31,700; and £43,900 will qualify you for a “comfortable” lifestyle. Retirees are expected to spend an increasing proportion of their budget on food, drink and socialising as their means increase. Oysters and champagne, garçon!
“In household budgeting terms, replacement rates and retirement living standards look at the same problem from either end,” says Tim Pike of the Pensions Policy Institute (disclosure: I am a trustee of this charity), “Do you start top down — money coming in? Or bottom up — money going out?”
For the purposes of retirement planning, it may be useful to apply the appropriate replacement rate to your income to see which Retirement Living Standard the resulting figure implies. But such numbers embody huge generalisations. There are many individuals to whom they do not apply.
These include retirees at the cutting edge of some costly trends. “An increasing number of people are extending mortgage terms into retirement,” says Blakstad, “Children are flying the nest later. There are also many households where one occupant needs care.” It is worth getting professional advice on your own circumstances.
The biggest problem with replacement rates and the Retirement Living Standards is that few Britons save enough to hit the higher targets these set. The PPI estimates only 13 per cent of households will achieve the “comfortable” standard. And this requires a top-up to pensions from other savings and from housing equity.
On that basis, three-quarters of households should reach or surpass the penurious “minimum” standard. This is mainly because most retirees are eligible, sooner or later, for a state pension currently worth about £12,000 yearly. This holds its value due to the “triple lock”, an annual uprating by inflation, earnings growth or 2.5 per cent, whichever is highest.
Some economic commentators bemoan the spiralling cost, not least because the well-off are as entitled to a state pension as the needy.
The triple lock is too much to unpack in a column already replete with jargon. I hope to return to the subject in search of a solid justification for applying the guarantee to better-off recipients, current or prospective. For the moment, “Baby, we’ve earned it!” is the best I can do.
Face it, haters. A triple lock and a free bus pass are very little for older Brits to ask for in a world where one septuagenarian American is demanding he should be given Greenland.
Jonathan Guthrie is a journalist, adviser and author of “The Truth About Investing.” [email protected]
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