Very sadly, there appears to be somewhat of an agreement between many people as to what amount you should assume you will receive from your state pension when planning retirement savings requirements…
Of course, you may actually receive something (perhaps along the lines of these US plans) – but for the purposes of planning how much you need to save, it seems that many people suggest assuming nothing. If you make this assumption, then anything you do receive will be a bonus.
This is somewhat upsetting for people who have paid in many, many thousands in contributions, but Martin Lewis back in 2009 likened the state pension to a Ponzi scheme.
The Ponzi problem
A Ponzi scheme is where the returns generated come from contributions made by new members, rather than from the return on investments made by the money put into the scheme originally.
These schemes cannot sustain themselves, so require a constant supply of new members contributing to continue functioning…
Changing age profiles
People are living longer, so there are an increasing number of people who will be drawing on the state pension.
That means large numbers of new members would be required just to keep things functioning…
Within the last 5 years we have seen:
2016 – record population growth of 538,000.
2012 – record retirements of 726,069.
So even with our best year for growth in population, we may have ‘lost’ 188,069 members of the workforce who contribute to the system in a year. As the census figures aren’t undertaken every year there will always be a delay in the numbers for retirements though.
And will the record population growth continue…
Or not? What happens when populations don’t grow, or actually reduce?
While the UK population is currently estimated to grow, what effect will brexit have on future numbers? And also what happens when the coming downturn in the economy arrives? (The economy is like the seasons, with periods of growth and reduction regularly occurring – some say that we are overdue a period of reduction now after such a long period of growth.)
Take a look at Japan for an example – their population is predicted to drop by a third over the next 50 years. This will cause serious issues for pensions(and healthcare.)
Within Europe, another example is Spain where the population is expected to drop 11% in the next 35 years.
If we have increased demands for money on one hand from more retired people and a likelihood of fewer people paying in on the other, then the sensible view is to assume the state pension may not exist when you retire.
If it does exist, then you have some extra money in retirement. If not, then you are prepared and can support yourself.
(There have been some hilarious campaigns around the world to try to increase the birth rate, but with limited success.)
How much do you need?
Even if you did receive the absolute maximum state pension, could you live on it alone? Despite being frugal and a minimalist you would be hard pressed to live off £8,000pa in the West with no other income.
(When looking at how much you need in your retirement pot – you could actually live quite well on £8,000pa in Malaysia or India for example. One of the reasons early retirees from the West consider moving East. A lower cost of living reduces the amount of money you need to save before retiring, but in the West costs are so much higher.)