A "good" pension lump sum varies, but generally, it's enough to provide a comfortable retirement income, often needing a pot that can generate 70-80% of your final salary, potentially 15-25 times your final salary, or enough to fund annual expenses (like $45k-$70k+ for a couple, depending on lifestyle) without depleting too quickly, while considering tax implications, your age, debt, and future costs like inflation and healthcare.
For people aged 60, Fidelity's retirement savings guidelines recommend an amount in savings worth six times your salary in order that you have enough to maintain your standard of living in retirement. So, someone earning £60,000 would need £360,000 in savings - which can mean money both inside and outside of pensions.
The general rule of thumb is to take the lump sum, especially if you are not 100% reliant on that guaranteed monthly income to live.
With that being said, what is a wealthy retirement? Well, according to ASFA, a comfortable retirement for a couple is around $75,000 per year and $53,000 for a single person. Given this, I would consider achieving a retirement income of, say, 30% over these amounts to be a wealthy retirement.
Believe it or not, data from the 2022 Survey of Consumer Finances indicates that only 9% of American households have managed to save $500,000 or more for their retirement. This means less than one in ten families have achieved this financial goal.
"You can live off $500,000 in the bank and do nothing else to make money, because you can make off that about 5% in fixed income with very little risk. Or you can make 8.5 to 9% in equities too, if you're willing to ride the volatility."
Making the Most of Your Lump Sum Payment
If you save or invest your lump sum, you might have to pay more tax on the interest or investment growth than you would leaving it in the pension – growth within a pension is tax-free.
While it's crucial for your health and happiness to stay active mentally and physically, it can also be equally important to recognize the value of doing nothing with the new time you have. In fact, research shows that there are mental benefits associated with doing “nothing.”
If you chose to invest your lump sum payment, the value of your investments will be subject to market fluctuations. This means that while the value of your investments may increase, it also may decrease. If you elect annuity payments, the investment risk remains with your company and the pension plan.
If you wanted to earn an average $3,000 per month, you would need to invest $1.6 million ($36,000 divided by 2.2%). While there is nothing wrong with passive investing, most investors are likely to do much better if they build their own investment portfolio.
If invested with an average annual return of 7%, it would take around 15 years to turn 500k into $1 million.
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The golden rule of saving 15% of your pre-tax income for retirement serves as a starting point, but individual circumstances and factors must also be considered.
When asked when they plan to retire, most people say between 65 and 67. But according to a Gallup survey the average age that people actually retire is 61.