Wednesday 7 December 2011

Prepare for Retirement!

Preparing for retirement should be the main long-term goal for the DIY Income Investor - preferably retiring early!

To me, 'retirement' means having the income to do what you want - but also will probably require you to live 'sensibly' (aka modestly).

However - in the UK at least - the trend is going the other way, with retirement becoming more and more fraught with financial difficulties.

Aviva conducts a survey every three months of people over 55, tracking their financial situation. The latest survey (published December 2011) is reported widely in the press (e.g. here and here) -  and the February 2010 version of The Aviva Real Retirement Report is available to download.

The key findings for me about people approaching or in retirement are:
  • Savings for older people (over 55) have fallen by 27% over the past year (average nest egg: £11,153), while incomes have dropped by 4% (average monthly income: £1,285); one in seven people over 55 have no savings at all, while even those who are saving are putting less aside every month (£26.90 down from £31.17)
  • Retirees (65-74 year-olds) have higher incomes than 'pre-retirees' (55-64 year-olds), with a consistent 'retirement bounce' at age 65, when payouts from state and company pensions lift incomes
  • Debt has risen by nearly 10% (average debt of nearly £22,000)
  • Over one-in-five retirees still work: the number of 65-74 year-olds who earn an income from wages, as well as a pension, rose from 18% to 22% over the year.
  • There are great inequalities: one in five 55-64 year-olds enjoy incomes over £2,500 a month, or five times the earnings of the bottom tenth; one in 10 are surviving on less than £500 a month, with single women most likely to be in poverty;
  • Their houses are more valuable: the average person aged over 75 owns a home worth £268,833 – significantly more than the value of the average home in the UK
  • One in 10 over-75s still have a mortgage; the typical size of the loan is £52,500, double the figure for the average annual salary! However, three-quarters of people in this age group who are homeowners do not have a mortgage, and own their property outright

Aviva found that few people start "actively thinking" about pensions until they are 48 years old, and take another four years before they do anything about it. The reasons behind the failure to start preparing for a pension income include:
  • 'lack of money' (cited by 47% of people)
  • 'existing family commitments' (cited by 19%)
  • confusion about pensions

An income-oriented DIY Income Investor approach to savings and investments helps to prepare for retirement as it:
  • builds up a passive income stream to supplement pensions
  • encourages saving
  • encourages paying off debt (including mortgage) well before retirement
  • helps to focus on reducing expenditure and financial planning for the future

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Most of the people getting old broke since they don't prioritize their retirement stage which is very important too.

  2. I have decided to set up a Sipp for my baby - at £100 a month to be paid till 18. What a gift!
    I have done some quick maths and with the following assumptions:
    5% increase in my yearly contributions, 5% return on the SIPP - 20% tax back every year and paid till 18 - it will give them a pension pot of £360 k. More scary is that if I adjust for inflation of 4% it is only worth 90k at todays prices. Still not a bad reserve.

  3. It is better to prepare for retirement at an early age. I heard there are on-sale retirement communities New York homes available now.