Knowing how much you need to set aside for your retirement is far from simple and new research from the Pensions and Lifetime Savings Association (PLSA) has revealed that 80% of people aren’t confident they are saving enough. While a third (34%) say they could save more for retirement, it’s possible that uncertainty about how much income they’ll need is preventing them from doing so.
The PLSA’s new report – Hitting the Target: A Vision for Retirement Income Adequacy, makes a strong case for the introduction of national Retirement Income Targets (RITs) to help people to better understand their retirement savings and the steps they can take to safeguard their future.
Evidence suggests that goal clarity is an important psychological mechanism that enables individuals to plan for the future. One of the most recognisable examples of this sort of approach is the five-a-day campaign, which has increased the average number of fruit and vegetables people in the UK eat.
In Australia, the Association of Superannuation Funds of Australia (ASFA) has adopted a similar approach to pension target setting.
Their targets are based on a basket of goods approach, where each target; comfortable, modest and basic is related to the cost of buying a number of different goods and services from travel and restaurants, to clothes and wine.
For example, a comfortable retirement would allow you to afford bottled wine, while a modest retirement would mean cask wine and a basic retirement would see you relying on home brew – motivation to save more for retirement if ever there was one!
Similarly, a comfortable retirement allows trips to the hairdresser while a modest retirement only gives you access to the hairdresser on ‘pensioner special’ days. If you have a basic retirement you face the prospect of having your friend cut your hair!!
Communicated in the right way, we think Retirement Income Targets could help millions of UK savers to better understand their retirement savings and the steps they can take to safeguard their future. But, to really succeed, the government, pension providers and consumer groups all need to lend their support.
Integrating Retirement Income Targets into the Pensions Dashboard, would be a natural fit, giving savers a simple indication of whether they are on track with their saving. But, giving a warning should be just one part of the equation. To be effective, it’s important that savers have the right information to take action. This could be through links to guidance or independent financial advice or simple tools and calculators which help savers to understand how they can move from ‘basic’ to ‘modest’ or ‘modest’ to ‘comfortable’.
Ultimately, anything which helps savers answer the question of ‘how much is enough’ has to be a good thing.
Amy Mankelow, Director of Communications, NOW: Pensions