Working out the cost of how much you need to save for a comfortable retirement is not an easy task – and the answers probably a lot more money than you think you will need.
Most people hitting 65 years old now would have started work in the 1960’s – leaving school at 16 in 1962.
Back then, the £1 in the bank stretched a lot further, because your spending power has shrunk by 94% during your working life, according to research by BM Savings.
Around 50 years ago, in 1961, £100 in the bank was equivalent to having £1,796 today – in reverse that means earning £5.57 was the same as earning £100 today.
Down the grocers – because supermarkets were still a way off in the future – a loaf of bread was 6 pence – about one and tuppence in old money – milk was 3 pence a pint and eggs were 25p a dozen.
That added up to around 7 shillings, still leaving you with 13 shillings change out of that pound. Now, you’d need £4.47 to buy the same simple staples in your local superstore.
The big question is how much money will you need just to get by if you are saving to fund your retirement in 10, 20 or even 50 years time?
The question is just as important for anyone about to retire as someone starting out on their working life. After all, around one in four under 16s and an increasing number of adults alive now are likely to celebrate their 100th birthday
In 50 years, bread has gone up 1,892%, milk by 1,367% and those eggs by 1,032%.
Millions will celebrate their 100th birthday
This year, inflation has run as high as 5.5%, if you go with the Retail Price Index. What will happen over the next 50 years is more or less anyone’s guess, but BM Savings reckon our bread, milk and eggs will cost just over £12.00 in 2060.
The fact is that someone who started work at 16 years old in 1962 can expect to see their 100th birthday in 2046, and many more who started work in the 1970s could be alive in the 2050s.
Granted, most will have an index-linked state pension worth £140 in today’s money to fall back on, but that provides more of a safety net than a decent standard of living.
The government wants to make everyone save more for retirement. Leaving £100 in a savings account for the past 50 years would have generated around £2,125 in interest, hardly enough for a decent retirement fund but then the average price of a house was £2,350 and a Manchester United season ticket was £8.50.
No one in the 1960s could have foreseen the economic up and downs of the past 50 years. The pound eroded in value most in the 1970s, with retail price inflation raging at an average 13% a year.
If prices continue to climb at the government’s target of 2% for inflation, over 50 years, spending power could decline by 63%. That’s the same as £100 today being worth £269 in 2060.
£8 a pint will have you crying in your beer
Putting that in perspective, a pension pot of £100,000 buys an annuity returning around £5,740 a year. In 20 years, that £5,740 will give a pensioner spending power of around £2,984 at 2011 values, a decline in value of 48% over 20 years with 2% a year inflation.
Even in the relatively short period of the last decade, a pensioner who retired in 2000 needs £131 in 2011 to buy the same as £100 bought then, and the past decade has been the least financially volatile out of the past 50 years for prices.
The decreasing value of money is reflected most in a basic shopping basket.
The average price for a pint of beer has risen 26 times over the past 50 years from 11p in 1960 to £2.94 in 2010. That pint could cost almost £8 by 2060 if prices rise by 2% each year.
Suren Thiru, economist at BM Savings, said: “There is no doubt that the value of money has fallen dramatically since 1960 because of the substantial rise in the general level of prices. It is likely to be reduced significantly further over the next 50 years even if inflation is kept firmly under control.
“However, today’s typical saver is very different to half a century ago with a much greater proportion of savers now viewing their savings as an investment, whereas 50 years ago peoples’ primary motive for saving was probably a precautionary one. A saver’s nest-egg will still go a long way with careful financial planning.”
TABLE: The changing cost of everyday items, 1960 – 2060
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