On average, millennials (aged 25 to 44) and Generation X (aged 45 to 64) expect an annual income of around £37,500 in today’s money by the time they retire, according to a survey by wealth manager Nutmeg.
However, this means that the average millennial saver must boost their pension pot by at least £777,000 over their working lives, according to estimates from Nutmeg. For the average worker, this would require a monthly pension contribution of £1,480, it said.
For Generation X, who are the next cohort to retire, private pots will need to be more than three times higher than the savings accumulated by current retirees to meet their income expectations, Nutmeg found. It means Generation X retirees would need to contribute £3,515 to meet their retirement dream, which would require a pot of around £916,000, according to Nutmeg’s calculations.
The research found the average 65-year-old underestimated how much they needed for retirement by £271,000. This is because they believed they needed a £29,500 income, but analysis of average private pension pots revealed they were on track to receive just £16,500 a year.
Yet the cost-of-living crisis could widen this deficit even further, experts warn, with inflation hitting a historic high of 9.9pc in August thanks to soaring energy and mortgage bills. Not only does this mean that many savers have less money to put towards their pension, their pot must also be larger at the point of retirement in order to keep up with higher future costs.
One in three retirees who have already started drawing their pension said it was not enough for them to live on, according to Nutmeg’s research.
Annabelle Williams, of Nutmeg, said that while household bills soared and a recession loomed, many may be tempted to reduce or pause their pension contributions.
She said: “The reality is that pushing pension contributions to the bottom of the priority list risks today’s cost-of-living crisis becoming tomorrow’s pension crisis.”
She added that pension planning was becoming increasingly important for younger savers. “They are less likely to step onto the housing ladder and grow their wealth that way,” she said. “Investing in a pension from an early age, for the long-term, ensures you benefit from compounding and have the best chance of securing the lifestyle you want in retirement.”
The dream of becoming a homeowner has become increasingly elusive for young people, as house prices remain elevated and the cost of borrowing grows. In June, the average first-time buyer in the UK took out a mortgage that was worth 3.65 times their income, according to the trade body UK Finance.
Adapted form an article in the Daily Telegraph by Lauren Almeid