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Brits underestimate retiring spending by £100k

Written by: Adam Lewis
Pre-retirees aged between 45 and 65 are underestimating retirement spending by £100,000, according to a new report which reveals how much a typical UK household will spend during their lifetime.

According to the investment group Tilney, analysis of data from the Office for National Statistics (ONS) reveals the average UK household will spend up to £1.9m (in today’s money).

With the first £1m of this being spent by the age of 50, it means the average adult still faces the prospects of sending £893,500 in later life, of which the report reveals £420,000 will be incurred during retirement.

This, states the report, exposes the pressure their savings and investments may come under in later life and is a red flag that people are not putting enough aside for their later years.

Where are people spending their money?

A third of the £1m of spending before the age 50 is on housing costs, while holidays, restaurants and entertainment will have cost them £203,000. For the top quartile earning households, where the typical lifetime spend jumps to a total of £2.8m, spending on leisure activities jumps to £342,000.

A typical retired household meanwhile will spend £99,500 on having fun, with £41,000 on holidays, £36,000 on entertainment and £22,000 on restaurants. A third (£141,000) will be spent on keeping a roof above their heads. For the wealthiest 25% of the country, only a quarter is spent on housing (£192,000), with £182,000 being spent on having fun, of which £74,000 is spent on holidays.

How to pay for it all?

While the vast majority of over 45 year olds think they will either improve (36%) or maintain (48%) their living standards in retirement, the report shows they are underestimating their retirement budget by nearly £100,000. They expect to spend £16,456 per year, a total of £325,800, but will actually spend £420,500.

The reports shows the average household will spend £26,500 every year between 65 and 75 and will need access to a post-tax income pot of £14,100 over and above the combined state pension of £12,407 to sustain these spending levels.

For wealthier households, the annual spend in today’s money for the first 10 years in retirement is £43,000, leaving a post-tax and state pension income shortfall of £30,900.

Andy Cowan, head of financial planning at Tilney, says while some of today’s retirees are in a position to enjoy recreation and achieve their desired lifestyle, those coming behind face significant pressures on retirement income and much greater uncertainty.

This, he says, is because the demise of traditional, predictable final salary pensions means they must overcome a number of hurdle is they want to ensure they can live with financial security in their own retirement. He says: “The key to enjoying a comfortable or even prosperous lifestyle in later life when you are no longer earning is, of course, to plan ahead and to start investing as early as possible.

“People set expectations for their living standards in retirement during their peak earning years in their 50s, and this is the time when most ramp up saving, but it is also important to invest it in the right places and minimise the burden of tax. Taking advice on how to do this effectively is vital to ensure our aspirations can be realised.”

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