National Savings Day 2023: The average couple needs more than £1m for a comfortable retirement

Thursday 12 October marks National Savings Day, an annual event created by US financial services group Capital One to help investors think about their saving (and spending) habits and what they can do to improve them if they’re not saving enough for their future needs.

Whether you’re planning for your retirement, building a nest egg to help your child through university, or just want some rainy day cash, everyone needs some money behind them to support their short, medium and long-term goals.

Here we take a look at the different ways to save, how to balance risk and reward, making your money work hard, and what to consider when choosing the best solution.

Bank of England backdrop

The Bank of England has been hiking rates for months in a desperate bid to get soaring inflation under control.

In fact, there were 14 consecutive increases in the base rate from December 2021 to cool spending and get inflation closer to its 2% target. At its last monthly meeting in September, the Bank’s Monetary Policy Committee narrowly voted in favour of keeping rates at 5.25%*.

The good news for savers is that banks have been passing on some of these increases, which means their money is earning more in their accounts.

However, not everyone is celebrating. The rate hikes have been disastrous for borrowers and homeowners on variable interest rate deals, while those rolling off their existing mortgages are having to re-mortgage at significantly higher rates of interest.

Cost of living

The cost of living increased sharply in the UK during 2021 and 2022, according to a research briefing published by the House of Commons Library. Inflation ultimately peaked at 11.1% in October 2022, a 41-year high, before it started easing**.

The study noted that UK consumer prices, as measured by the Consumer Prices Index (CPI), were 6.7% higher in August 2023 than a year before. However, they were down from 6.8% in July 2023**.

The UK appears to have the stickiest amount of inflation in its system versus its global peers - principally due to wage demands and low levels of unemployment in the UK. The Bank of England is hopeful inflation, which affects affordability of goods and services for households, will fall to around 5% by the end of this year, and reach 2% by early 2025***.

Freeing up cash

It’s also worth exploring whether you can cut your outgoings and free up some money that can be tucked away.

If you could find just £10-a-month that would give you an extra £120 in a year. Investing that could see it grow further.

So, how much should you be saving? Well, one approach is the 50-30-20 rule. This suggests that 50% of your income should go on essentials, 30% on non-essentials, and 20% into savings.

Investing

How much money you’ll need in the future will depend on your individual goals, aspirations, and existing savings.

For example, The Pensions and Lifetime Savings Association publishes annual estimates for ‘retirement livings standards’ at three levels of income: ‘minimum,’ ‘moderate,’ and ‘comfortable.’ It’s estimates for 2023 found that a single retiree would need a minimum annual income of £12,800, this rises to £23,300 and £37,300 for the moderate and comfortable retirement lifestyle. These numbers are higher for couples in retirement^.

Today a 65-year old in England could expect to live on average to almost 84 if they’re a man, while if they’re a woman they could expect on average to live to 86^^. Assuming they retire at 65, this means men and women can expect 19 and 21 years respectively in this phase of their lives. Using the moderate annual level, this means the average male would need £442,700 and the average female would need £489,300 in retirement.

To live comfortably, the average couple living 20 years in retirement would need an income of £54,500 a year^ – that is almost £1.1m in total.

As a result, many people will need to consider stock market investments in the hope of generating significantly higher rates of return than on offer from savings accounts.

The good news is there’s no shortage of investment funds. The ideal solution will depend on your requirements and attitude to risk.

Funds to consider

With bonds yielding attractive returns once more, I’d look to the likes of a strategic bond fund like M&G Optimal Income or the Premier Miton Strategic Monthly Income Bond. Both can invest across all types of bonds and – in addition to the attractive yield - offer the potential for capital growth.

Presuming your investment would need to last two decades an element of growth will be essential. For this I’d look to global equities with a fund like JOHCM Global Opportunities. The philosophy of this fund is 'heads we win, tails we don't lose too much' with the manager happy to hold large cash positions if necessary. Those preferring to invest closer to home, might consider the Artemis Income, a high-conviction portfolio of UK stocks, targeting a rising income and capital gain.

If you’re looking for something a little different, then the Cohen & Steers European Real Estate Securities could fit the bill. This investment house is the industry leader in real estate securities. We believe the resources and experience of the team can deliver a repeatable, sound process.

*Source: CNBC, 21 September 2023
**Source: House of Commons Library – Rising Cost of Living in the UK, 22 September 2023
***Source: Bank of England – When will inflation in the UK come down, 21 September 2023
^Source: Aviva: How much should you pay into your pension, 13 March 2023
^^Source: Aviva: How long will retirement be?, 19 December 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.