People are significantly underestimating retirement costs

Global study is a warning for investors

People are significantly underestimating retirement costs
Steve Randall

The cost of living in retirement is far more than most people believe according to a new global study.

The poll of 22,000 people in 30 countries including Canada, Australia, France, the UK, and the US, found that people expect to spend an average 34% of their retirement income on basic living expenses – the reality is 50%.

The disparity in perceived living expenses was most pronounced in the Americas where, on average, non-retired people are expecting to spend 32% of their annual income on living expenses. Instead, basic living costs in the Americas accounts for 53% of retirees’ incomes.

Schroders Global Investor Study 2018 also reveals that 15% of retirees globally do not have enough income to live comfortably while a further 43% said they could use “a little more” income.

“There is a real danger that people globally are underestimating the proportion of their retirement income that will need to be allocated to basic living expenses and the amount of money they will need to live comfortably in retirement, particularly in the current environment of low returns and increasing inflation,” said Lesley-Ann Morgan, Global Head of Retirement, Schroders.

There is also a gap between how much those soon to retire believe they will need compared to their current income. Many believe that 74% of the current salary will allow a comfortable retirement income but the study shows that retirees are on average receiving 61% of final salary.

Retirees continue to invest significantly

Retirees globally continue to invest an average 19% of their income but those yet to retire are lagging with just 9% of their retirement savings being invested.

“Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up a savings gap,” added Morgan. “Perhaps as a result of not having enough in retirement, our study showed that retirees were continuing to invest, and this often represented a larger amount than they expected prior to retirement.”