The vast majority of couples born in the 1940s have levels of wealth that are more than sufficient to maintain their standards of living into and through retirement. This is the main finding of Retirement Sorted? The adequacy and optimality of wealth among the near-retired, new research published yesterday by the IFS and funded by the Joseph Rowntree Foundation and the Economic and Social Research Council.

The research takes two approaches to assessing financial preparedness for retirement. The first approach is to compare the wealth holdings and estimated retirement income of couples with their average earnings between ages 20 and 50. ‘Replacement rate’ approaches of this type have been used widely before in the UK, including by the Department for Work and Pensions, to assess the adequacy of retirement wealth. The second approach uses an economic model of behaviour over the life cycle to estimate, for each household, how much wealth they would have needed to accumulate in order to expect to maintain a stable standard of living throughout their lives.

Using the first, straightforward approach, it is estimated that:

  • 80% of couples born in the 1940s have annual gross pension income at age 65 (from state and private pensions) that replaces at least two-thirds of their average annual working-life earnings (adjusted for price inflation). Over 40% have gross pension income in excess of their average real working-life earnings.
  • If you also take account of the income that could be generated from other financial wealth holdings (i.e. ignoring housing), 90% of couples would have replacement rates greater than two-thirds, while nearly 60% would have greater income in retirement than average real earnings during working life.
  • Taking account of housing wealth as well raises the proportion able to replace more than two-thirds of their working-age earnings in retirement to 98%. We estimate that 84% could replace more than 100% of their average real gross earnings during working life on this basis.

Comparing the level of gross retirement income with working-life earnings is a simple way of assessing the adequacy of households’ retirement resources.

They also used a novel alternative approach to assess the adequacy of retirement resources. The model also takes into account that households would have access to means-tested pension credit in retirement if they have low incomes. They found that:

  • 92% of couples born in the 1940s have accumulated more wealth than the model suggests they need to maintain their standards of living into and through retirement. The surpluses are substantial on average – the median surplus being over £220,000, which would be enough to produce around £7,000 a year of income if used to buy an index-linked annuity.
  • The surpluses are larger for those with higher average lifetime earnings than for those with lower lifetime earnings, and for those who live in London than for those who live elsewhere in England.
  • Even excluding housing wealth, 75% of couples have more wealth than the model suggests they need to maintain their standards of living. The median surplus is over £120,000.

Cormac O’Dea, a Senior Research Economist at the IFS and one of the authors of the report, said: “The large majority of couples reaching state pension age in recent years have more wealth than necessary to maintain their standards of living into retirement. This is a cohort that has, as it has turned out, ended up saving more than they needed for retirement. The picture for future generations, however, may look quite different.”