What is the retirement income gap?
You may believe you have thoroughly planned for your retirement. You have contributed to your teachers’ pension, and you expect a state pension on top. You have some money in savings, just in case. However, no matter the planning, there can be unexpected events, and the cost of living can rise. The Retirement Income Gap is the difference between your retirement income and your cost of living in retirement.
What can cause this shortfall?
There are lots of details of your retirement you cannot predict. You may incur additional expenses due to an illness, either yours or that of someone close to you, for instance. You may have underestimated the impact of inflation. You will likely have struggled to conceive of 30 to 40 years of life outside of work living life meaningfully.
In short, what seems like much money now and what looks like a plausible life expectancy may be different in the future.
Will the retirement income gap impact you?
The retirement income gap is difficult but not impossible to plan for; it is just a matter of setting aside additional contingency.
The Teachers’ Pension Scheme is generous. You will enjoy an annual income, and this is index-linked, which should help protect you to some degree from rising in the cost of living. However, this yearly income will only be a proportion of the salary you enjoy while you are working. The state pension will not make up the difference.
To balance this, you may have paid for your home or be living in a much smaller house in retirement. Your travel to and from work and miscellaneous expenses such as work clothing will have all but gone.
However, it is worth knowing that, according to Age UK, some 16% of pensioners are living in relative poverty.
What can you do?
Thirty-years of retirement is a long time. You will want to spend this time meaningfully. These two factors added together mean you will need access to funds; you will need an amount of money available to live comfortably and without worry.
To avoid a retirement income gap, you need to start planning early. If you are approaching 50, it is neither too soon, nor too late, to make choices that can secure your income later in life. A lot of the planning you need to do is about successful timing. You need to know when you want to retire; when you want to claim your teachers’ pension; when you want to claim your state pension and more. It would help if you also thought seriously about how you want to spend your time in retirement and how much this will cost.
When you have all these details plotted out carefully, it is a good idea to see a financial advisor. There are so many choices you can make to maximise your income in retirement.
The content in this article was correct on 10th August 2019. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.