Why I’m on course for a miserable retirement

My Dad is 52 and works as a Sales Director. His job is more than just demanding, it’s psychologically and physically draining. On the plus side, he earns a very good salary. Meaning, when he reaches 55 (pension drawing age), he could potentially retire early. Which is what I’d like to see him do for the good of his health. A recent conversation with him on this subject sparked me to think about my own retirement.

Whilst I have always contributed to a pension, I never really gave much thought to getting old. What age might I want to retire? What sort of lifestyle would I like to have during my golden years? And how much would I need in my pension pot to afford all this? I guess some young people find these sort of questions either depressing or impossible to fathom. It just seems so far off. To be honest, I find it sort of empowering. Although, having now looked at the numbers, the prospect of me retiring early, looks highly unlikely based on my current circumstances…

My approach to saving for retirement

As mentioned, ever since my first full-time job (aged 23) I have been contributing to a workplace pension. I have always chosen to contribute the maximum percentage of my salary that my employer would match. Not a penny more. Why? Partly because London is expensive, and I wanted to enjoy myself. And partly because I have always been a basic-rate taxpayer. This means that I have only been receiving 20% tax relief on my pension contributions.

What’s the current status of my pension?

As a result of the above, aged 29, I currently have a pension pot worth £17.5k. Not a huge sum of money but a foundation to build upon, and one that will benefit from at least 25 years of compounded investment growth. At the time of writing, I am contributing 4% of my gross salary to my pension and my employer is matching this.

What’s my target retirement age and pot size?

There are all sorts of factors such as health and career progression that may alter my target retirement age in the coming years. My current thinking is that I would like to retire around age 60 and draw £17k / year from my pension pot. Why £17k? £1,400 / month is a modest income but, without a mortgage to pay for, I think it’s enough for a comfortable living. £17k is also an amount for which you would pay no tax because 25% of pension withdrawals are tax-free and the tax-free income allowance is currently £12,500. It’s worth noting that you would need a pot totalling ~£550k by age 60 to afford to draw £17k / year from your pension.

Am I on course to retire by 60?

I decided to enter the above information into a pension calculator. I set the parameters to what I have outlined above. The result was depressing…My estimated income came out as £8,558 / year- about half what I would like it to be! A play around with the calculator suggests that, if I want to hit my target, I would need to be making pension contributions that are closer to 15% of my salary!

My pension calculator results

What’s my plan?

Whilst a bit of a shock, the above exercise has been good to go through and has been a stark reminder to not rest on my laurels. I am not going to panic and immediately increase my pension contributions to 15% because I have other things to save for, such as my half (£34k) of a Help to Buy government loan.

As mentioned earlier in the post, whilst I have been a basic-rate taxpayer for the last 7 years, I have consistently increased my salary by several thousand pounds each year. Based on this, in the next 1-2 years, I would expect that at least 10% of my salary will be taxed at 40% and it is at this point that I will start to increase my pension contributions. Put simply, I plan to allocate the entirety of near-future pay rises to my pension benefit from tax relief at 40%.