Financing retirement is a lot more expensive than most people think – and many financial firms are warning people are not saving enough for a comfortable life after work.
Of course, many financial firms are key stakeholders in pensions and annuities as they make money from the cash they manage for retirement savers.
But the writing is a on the wall for many – as figures from HSBC Bank show a fifth of retirees fall off an income cliff when they stop working and lose an average of half of their income.
At the same time, most retirees need more money as life expectancy is improving and the spectre of paying long term care charges looms.
“For the last generation, giving up work at 60 was a realistic goal,” said Simon Williams, group head of wealth management at HSBC.
Best retirement advice
“Many could afford to retire younger thanks to generous company pensions.
“But the world has moved on. People are living longer and the dream of retiring at 60 is fading. Governments are increasing retirement and pension ages. Many company schemes are in the red and guaranteed pensions are disappearing.”
In the HSBC study, retirees were asked about the best financial advice they had been given. The advice was not always followed, but pulled together, gives a financial plan for retirement savers:
- Begin saving young
- Save regular, small amounts
- Don’t borrow to buy luxuries you cannot afford
- Buy a home when you can afford one
- Follow an achievable financial plan
The research also shows that as people live longer, new financial problems arise.
For instance, instead of financing children, the current generation of retirees are the first to have to consider helping elderly parents as well.
“Around 14% of retirees have contributed money to caring for elderly parents. Families have two generations in retirement at the same time, while many also support children,” said Williams.
Why pensioners have a cash shortfall
HSBC also looked at why retirement savings were falling short of expectations and came up with a list of reasons:
- Ineffective financial planning 35%
- The impact of global economic problems 34%
- Surprise expenses 24%
- Financing children 21%
- Still repaying borrowing 21%
- Financing parents 7%
- Falling house prices 6%
- Reliance on inheriting money that turned out less than expected 4%
The conclusion is everyone has to take more responsibility for their retirement finances and can no longer look to the state to provide for more than their basic needs.
“On average, people expect their savings to be spent before they die. Those in retirement expect their money to last 12 years, but have a life expectancy of 18 years after giving up work. Many have no way of bridging this gap,” said Williams.