All the world’s a stage, And all the men and women merely players
So pronounced Jacques – by way of William Shakespeare – in As You Like It, before going on to describe the “seven ages of man”, from “infant mewling and puking”, through schoolboy, lover, soldier, justice, “the lean and slippered pantaloon” to old age – “Sans teeth, sans eyes, sans taste, sans everything”.
We would not wish to take a metaphor too far in comparing Aviva’s latest Real Retirement Report with any of the works by the great man, but our latest research in the series – which now dates back to 2010 – explores a similar theme: the different ages at which people in general start to move from one financial ‘age’ into another and what this tells us about the sort of advice they will need at different life stages.
Knowing the characteristics of people in the different financial ages, and when they typically move from one to another, is a great way of starting those conversations. Understanding the value of moving through the ages could trigger the decisive action people need to take to make the most of their opportunities to begin saving in time to provide for a comfortable retirement.
When putting together the report, we asked over-50s who had taken pro-active steps to save for their retirement to recall when they started taking significant steps to do so. From this, we have constructed the following ‘Seven ages of retirement planning’.
Over-50s who had planned nonetheless said they had spent their 20s not thinking about retirement savings – even those who were in a position to act. Just over a quarter of people (28%) had started saving into a pension in their 20s, but only 5% had thought about how much money they would need for this later stage of their lives. Although retirement is a long way off for people in this age group, it is useful to start thinking about rules of thumb at any age. A useful starting point is to begin saving for retirement at least 40 years in advance.
33 is the average age when people start saving into a private pension. This is when they should be giving more thought to how much they are going to need in retirement and what they need to do today to achieve this. Regardless of when people begin saving, they should aim to amass a pension pot of at least 10 times salary by retirement. It is important to try to bring this to life for those who are starting out – for instance, if you simply stick £10 in a jar every month, over 40 years you’ll amass £4,800. If this is invested instead, it could grow in value to something significantly more thanks to investment returns.
Realisation starts to dawn
Typically, people are 36 when they start to become aware of what their and their employer’s contributions to their pension are. If people do not save in the workplace pension, they will not be entitled to extra money from their employer. At 36 – assuming an average wage and 15 years of employment – tax relief and employer contributions could have added more than £90,000 of extra cash to a pension pot – a substantial sum that puts into focus the benefits of pension saving.
39 is the age when people say they started to take their pension saving seriously – as the clock ticks, they realise the importance of sorting this out to ensure their retirement years will be comfortable. Saving for retirement should not be a ‘set and forget’ activity. Encourage people to check at least once a year to see if they are on track. Every 1% extra saved into a pension at this age could contribute an additional £13,000 into the pension pot at retirement, once tax relief and investment growth is taken into account.
Calculation – how much do I save, and how much will I need?
Even though they have realised how important this is for the last six years, people generally reach 45 before they start calculating how much they will need in retirement, and how much they need to save to achieve these levels. Someone who is 45 today has more than 20 years of potential saving before they reach their state pension age – and small changes can be made now to plug gaps between what people will need, and what their pension pot will provide for them.
Start doing more
When people get to 47, they start to ramp up pension saving in the run-up to retirement. This is a significant time when advice is vital to guide choices for the best outcomes. There are many considerations to be made during this age of pension planning, including taking advantage of tax boosts available, and reviewing investment options. It may also be a time to reframe expectations. The longstanding state pension ages of 60 for women and 65 for men were set in the 1940s when life expectancy after retirement was perhaps 10 years. Today, it’s a reasonable assumption to at least double that, and state pension ages do not apply until people are older – another reflection of increased longevity. Both these factors have obvious implications on the level of income that will be needed post-retirement.
The golden age
People’s peak earning years typically start at 51 and last for an average of five and a half years from then. This is the ideal time to take further steps to save towards retirement income – however, although 34% do save more during this period only 12% say they have or would save more into a pension. And only 13% say they have or would seek professional advice via a financial adviser, which may be one reason why so few are concentrating on adding to their pension pots despite being in such a crucial earnings period.
It also represents a great opportunity for conversations about retirement planning during this age. Our analysis in the Real Retirement Report shows that investing an extra £100 monthly through five years of peak earning could result in an additional boost of £25,000 in the pension pot by the time retirement comes around.
‘Present bias’ – the difficulty of envisaging ourselves at any point in the future – is a well-known barrier that prevents people planning well for their retirement. Understanding when people typically act helps to frame advice discussions around the impact their actions now will have on their future prosperity – and ultimately how they benefit from moving through their ‘seven ages’ more quickly.
Tim Orton is CEO of Aviva Adviser Platform. You can read Aviva’s latest Real Retirement Report here and find retirement-focused online calculators to use with clients when planning for retirement here