The other day I was walking our lovely puppy in the nearby park. Dog owners stick together and talk to each other. You’d be surprised what you can learn in the park while throwing a slimy tennis ball around.
You don’t believe me? Well, I used to talk to a woman who told me that she’s had lovers all through her marriage. Thing is, I knew her husband as well and liked him a lot. Eventually she caught her and the whole thing ended up in custody battle for the dog.
Anyhow, this time there was nothing as dramatic as that. At my age people talk to me about their pains and aches; or if I’m lucky they bring in some excitement by discussing pensions and retirement. So, I was chatting to a lady who just happened to mention that she doesn’t have any pension.
Thinking about it, she wasn’t even upset or worried; she just dropped it very matter-of-fact in the conversation.
Just a minute, I thought. What’s happening here?
I started worrying about my pension almost immediately after I graduated. I remember standing outside the library (yes, we academics used to work in libraries back then) and telling a priest (don’t ask) that I should get a position soon if I am to have a pension later.
I worried about pension in my thirties as well; in my forties I made generating retirement income my priority.
At the same time, since my early thirties when I got an academic position in Britain I’ve been contributing to a very beneficial and generous pension scheme.
We are still focused on making sure we can have decent income in retirement. And this is why I believe you should make generating retirement income your priority as well.
- One day you won’t be able to work. It doesn’t matter that you are still young, strong and able to work. One day in the future you will either be unable to work or you wouldn’t wish to work any longer. Making sure you have what to live on when this time comes is a priority.
- You have to take responsibility for your retirement. There was a time, not so long ago, when people were expected to take care of their parents when they got old. This time is gone: in today’s industrial societies there is no such expectation.
- There are some nifty financial vehicles around. Concerns around aging population and insufficient pension funds in most countries (this excludes Finland where pension funds are still healthy) have led to the development of many financial schemes that include matched contribution from the employer, the state and/or tax relief. In the US there are defined contribution plans like IRA and 401(k); in the UK there are occupational pensions and individual or personal pensions (Self Invested Personal Pension or SIPP being the new kid on the block). In fact there are some really cool possibilities even for free lancers and contractors.
- Your children won’t be able to help. I belong to a generation of people who know that we’ll be better off financially than our children. The economy is changing, secure jobs with generous pension schemes are disappearing and free-lancing and working casual jobs is on the raise. Does it sound like your children will be able to help you when you are not able to make a living any longer?
- Social security and state pensions are going to disappear. Yes, the retirement income states used to provide is going down; so much so that it is not enough even for food at the moment. And you know what? If I were a gambler I’d put my pension fund on a bet that state provisions for retirement are going to disappear completely within ten to twenty years.
- Old age is expensive. You know, people somewhat mistakenly believe that they won’t need much in old age. From what I’ve seen and researched this is incorrect: old age is expensive, it is just that what people spend their money changes. Young people need money for going out, study and adventure. Old people need money for dental care, medical bills and old people’s home expenses. This stuff doesn’t come cheap.
Finally…
A new report from Barclays says that people need about $30,000 per year in retirement to enjoy a comfortable life. I am not convinced: this may be true today but it certainly won’t be enough in fifteen years’ time. To get this annual retirement income you need to save a pension pot of close to $600,000.
How much is your pension pot at the moment?
photo credit: J.C. Rojas via photopin cc
At first, I was confused. For us in the US, a pension is a very specific thing: it’s the amount that a retired worker is paid by their former employer in retirement. I think you are referring to a pension as retirement savings. Incidentally, one can turn a retirement nest egg into a stream of income, much like a pension, through annuities, but I think you are referring to the broader category of retirement savings. To me, this is an important distinction because the majority of American workers will never see a pension and we must now do all of our own retirement saving and investing.
I am on track for a retirement that is at my current standard of living. Something good (inheritance) or bad (job loss, poor economy) could change things so I try to keep on top of things as best I can.
@Scooze: I am so sorry to have confused everybody. Yep, I live in the UK and here a pension, or a pension fund, is a financial instrument that is to provide income in retirement. So, all I said was about retirement savings. In the UK we have three types of pension: state pension (this is paid out of a state pot all working people in the UK pay about 6% of their salary into); occupational pensions (this go via the employer and can be ‘defined benefits’ or ‘defined contributions’) and individual/personal pensions (one variety of this is self-invested). As you can see, it is all very clunky and is bursting at the seams. This is why, anyone under 45 should think very carefully about creating retirement income.
I do not think they even have pensions anymore. Those were the good old days. If you do not save for retirement yourself you are going to regret it.
@ Milissa: Quite right! This is true all over the world. Unfortunately, we are in a process of transition and my worry is that many people will find themselves without retirement income.
I was confused too until I read Maria’s background. She lives in the UK. I assume she means retirement savings.
@ Daizy: Yep, as I said, retirement savings :).
In Canada we have the same assortment of retirement income possibilities:
1. government pension (Canada Pension Plan, or CPP). All working Canadians make payroll contributions and some people count on it still being there while others figure it won’t be there by the time they retire. These funds don’t start until you are ~65 (penalties for starting payments earlier, bonuses for starting later).
2. Pensions paid by past employer(s) (based on defined benefits or defined contributions) If your company even offers a plan it’s now likely a defined contribution plan. Very few people currently in the work force will have a defined benefits plan. They are just too expensive and risky for the employer and have been phased out in most of the private sector. Exceptions – public sector (government) employees and most unionized positions.
3. DIY retirement (RRSPs, TFSAs, etc). This is what most of us will rely on. There are many savings methods/programs to accomplish this but the investment return risk is all on you.
The upside of an employer defined benefit plan is that you put in the required years/decades and you know you’ll be paid $x /month at the end (unless your company goes bust, in which case you can sue but your pension may lost or at least reduced). Government employees don’t have to worry about their employer’s stability; if the plan is underfunded the tax payers pick up the slack. You’re welcome. The down side of a traditional employer pension is that you have to put in all those required years/decades to qualify for the pension. Being forced to go the DIY route allows you to make choices about when to retire. Nobidy is forcing you to work until you are 65. When you’ve saved enough that your retirement living expenses can be covered by 4% of your savings you are free to go. Given a choice do you really want to work for 30-40yrs? No? Me either, so save more and retire younger, and design a lower cost lifestyle so a smaller pot of savings is needed. No waiting until the age+yrs of service math works. My only regret is that I didn’t know how much shorter my working life could have been if I’d been a more abitious saver in my early years. I did the recommended 10-15% and throught I was doing well. Yes, if I wanted to retire at 65. I never thought about what it would take to retire at 50, or 35. Both are perfectly doable but you need to decide to take that route in your 20s. I was in my early 40s when I realized I could have been retired quite comfortably before I was 40. I certainly picked up the savings pace in the past few years but we’ll only be able to move up our retirement from 65 to 55. Better, but not nearly what could have been.