How much will today’s youngsters need to enjoy a comfortable retirement? According to research, they could need a pension pot of around £3 million based on long-term assumptions about inflation, investment returns and retirement spending. Rathbones calculated that Generation Z – those born between 1997 and 2012 – will require this sum by the time they turn 65*.
But how can this be achieved? Here, we review the research and suggest funds that can help those in their twenties reach this seven-figure target.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
The retirement issue
According to Rathbones, a 25-year-old today will need a £3.1 million pension pot to retire at 65 and live comfortably for 25 years. Its calculations were based on how much Pensions UK estimates is needed in retirement, and the impact of inflation. This was estimated at 2% annually for the next 65 years – 40 years until giving up work, then a further 25 years in retirement*.
Rebecca Williams, Divisional Lead of Financial Planning at Rathbones, says inflation can quietly erode retirement savings and have a significant long-term impact. “What’s considered an adequate retirement nest egg today may barely scratch the surface of what Gen Z will need when they retire,” she said.
Current situation
The warning comes as official government research shows that a staggering 14.6 million people (four in 10) aren’t saving enough for their retirement**. Currently, a one-person household needs £13,400 per year for a minimum standard of living, £31,700 for a moderate lifestyle, and £43,900 to live comfortably, according to Pensions UK***. For a couple, these figures rise to £22,000, £44,000 and £61,000, respectively, and cover household expenses, food, transport, holidays, clothing, and helping others. Using these sums, Rathbones estimated that a future £947,700 pot is needed for a minimum lifestyle, £2.2 million for a moderate standard of living, and £3.1 million for comfort*.
How to reach £3 million
To build a retirement pot of £3 million by age 65, a 25-year-old needs to save approximately £1,600 per month (or £19,200 per year), according to Rathbones*. This assumes contributions increase by 2% annually (such as through pay rises) and the pot grows at 5% per year. It’s worth noting that this may be a challenge at certain times. Building such a financial war chest and managing it through life’s peaks and troughs will require a variety of investment strategies.
The following asset allocations are general examples of how some investors could approach long-term investing and are not personal recommendations.
Early years
The first 15 years are the prime risk-embracing period. It’s the time when you can invest in high-growth equity funds that can earn decent returns. The more you can build at this stage, the more potential compounding benefits you are set to enjoy over subsequent decades. Therefore, equity exposure will be between 80% and 100%.
Consider emerging-market portfolios and even thematic funds to take advantage of trends that are currently rewarding investors. Possible funds could include broad exposure via the FSSA Global Emerging Markets Focus or M&G Global Emerging Markets funds.
If you want a more hands off approach, a multi-asset fund might be a better fit. The VT Chelsea Managed Aggressive fund is one option for those with time on their side and are willing to take a higher level of risk. In return for this risk, the aims to deliver the highest long-term growth by investing heavily in stock markets are the world. The fund invests heavily in stock markets around the world.
Mid years
The next stage in the journey covers years 15 to 30. While it’s still crucial to be growing your pot, it’s also important to start diversifying and ensuring a spread of asset classes. That means maintaining an equity exposure of 60-80% while supplementing it with fixed income and other asset classes, such as infrastructure.
You can consider some balanced, multi-asset portfolios. The VT Chelsea Managed Balanced Growth fund is a prime example. It’s a multi-asset fund with flexibility. In the VT Chelsea Managed Balanced Growth fund, we aim to grow your money over the long term. At the same time, we don’t want you to lose sleep if the stock market tumbles, so we’ll strive to build a portfolio with lower volatility than equities.
Those building their own portfolio might consider a broad spectrum global equity fund as this stage, such as T. Rowe Price Global Focused Growth Equity or the BlackRock Global Unconstrained Equity fund. Additionally, a strategic bond fund whose manager can invest in a range of fixed-income opportunities also makes sense. You might consider something like Aegon Strategic Bond for that role.
Final years
This is the rundown to retirement. If you’ve put in enough work, your mid-50s to mid-60s will be more about consolidation. Equity allocation will therefore fall to 30-50%. Solid income-generating funds like JPM Global Equity Income or Fidelity Global Dividend are examples of funds in this category and are established portfolios with strong track records. Once again, strategic bond funds can play an important role. We like M&G Optimal Income’s flexible mandate, which gives its manager the freedom to act.
You can also consider other income-generating funds. For example, the FTF ClearBridge Global Infrastructure Income fund offers an excellent yield and has delivered strong performance. The fund, which aims to provide a good income with stable growth and some inflation protection, combines regulated utilities with infrastructure, such as railways and roads.
When you’re relying on your savings to generate an income, you want to know they’re working hard. That’s where the VT Chelsea Managed Monthly Income fund comes in. The fund aims to pay the same amount of income each month^ so that you can budget with confidence. The fund has a current yield of 5.8%^^.
Investing with the Chelsea Pension
Starting your retirement planning doesn’t have to be overwhelming. The Chelsea Pension makes taking action easier. With transfer support, no set-up charges and expert support from Chelsea’s operations team, you can start today. Read more about the Chelsea pension.
The Chelsea Pension is a self-invested personal pension designed for investors who want to manage their retirement savings. Pension rules, benefits and tax treatment depend on individual circumstances and may change in the future.
