One of the most common concerns of most workers, especially those approaching retirement, is how much money they will need. The question is obvious: Will I need to maintain my purchasing power, or will a slightly lower monthly income suffice?
The answer, however, is not the same in every case. Obviously, each person is different. Considering income once they stop working depends on their personal situation, needs, and living standard. We tend to think that when we retire, our life will be quieter, and expenses will be lower. But this is not always the case. We spend more free time, and our health is more fragile; therefore, these expenses sometimes increase considerably. In any case, a series of factors affect all workers in the same way and, therefore, condition people’s future retirement.
The amount of the pension lower than our last salary
In most cases, the retirement pension will be lower than the worker’s last salary. In other words, the first thing to consider is that the amount of our public pension will be less than the last salary received. This contrasts with the reality of many who arrive at retirement without savings to supplement their pension.
The average European worker will need to have a capital sum saved. That will allow them to obtain additional income should they wish to maintain the same purchasing power that they had during their last working years. In addition, the amount of this capital will depend on our life expectancy at the time of retirement. For example, it is estimated that life expectancy in Germany is around 83 years and is expected to reach 86 years by 2040.
Inflation is an invisible element that conditions our future pensions
The generalized rise in prices in a country is an invisible element. Still, it has a significant impact on the value of our money in the long term. That’s why it’s essential to consider the effect of inflation on our future pension, especially if that time is still a long way off.
Inflation can increase exponentially year after year. Therefore, we must be aware that our contributions to a pension plan or other savings instrument must have an annual return. That is equal to the level of inflation if we want to maintain the same purchasing power. For example, with an average annual inflation rate of 2%, we will need €1,811.3 in 30 years to maintain the same purchasing power as €1,000 today.
Is it possible to know precisely how much money we will need?
Knowing how much money a person will need for retirement depends on their situation. According to a US bank Merrill Lynch study, 70% of pre-retirement income should be enough to maintain the previous standard of living.
Deutsche Bank goes a step further. Estimating the average amount of savings a person needs to maintain this standard of living after retirement at 100,000 euros and to consume the capital during the time remaining to him or her (taking into account a life expectancy of at least another 20 years). While no formula is exact, there are several methods to get a rough figure for this income. One of the simplest is to follow these steps:
- Multiply the monthly expenses needed to maintain your current standard of living by 12 (for example, €900 x 12 = €10,800).
- Calculate the amount you receive as a Social Security pension (for example, €600 x 12 = €7,200).
- Subtract the first amount from the second (10,800 – 7,200 = 3,600 euros).
- And multiply this amount by our estimated life expectancy from the time of retirement (3,600 x 20 = 72,000 euros).
This is an approximate figure because there are many expenses that we will no longer have to bear, such as raising children or commuting to work. This new personal situation means that it will not be necessary to keep the same amount of money to have a similar standard of living. For this reason, everyone needs to keep track of the above premises to start saving.