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How much one needs to retire is a question that Britons must ask themselves as they plan for their post-working life. Calculating how much one needs to retire comfortably can help inform decision making for savers as they look towards the future. However, one in three Britons do not know how big a pension pot they will need and one in five do not even know how much they currently have.
Rob Gardner, Director of Investment at St. James Place Wealth Management spoke exclusively to Express.co.uk on how much one needs to retire, including tips for pension saving in one’s 20s, 30s, 40s and 50s in order to maximise retirement savings for later life.
He said: “I advise getting clear on how and when you want to retire so you can work backwards to calculate how much to save.
“For example, if you knew you were going to live to 100 years old, would you save more money? Most people underestimate how long they will live by around 20 percent. That’s huge! If you live for another 30 years, that’s six years without any cash.
“In fact, the average man runs out of money 10 years before he dies, and woman 12.5 years. If you’re a couple, the chances of one of you living to 90 is about 50 percent, so if you’re still married when you retire there’s a high chance, you’ll need to plan for that.
“A good rule of thumb is to have a pot worth ten times your annual salary by the time you retire, which sounds like a lot, but is achievable by starting early and breaking it down into simple steps – like setting a savings goal for every decade you’re in employment.”
Here are Mr Gardner’s exclusive tips for pension saving from one’s 20s through their 50s:
In your 20s…
The earlier you start putting money away, the greater your chances of building a pension pot that can last the rest of your life. In your 20s, you should aim to have saved the equivalent of your annual income by age 30. So, if you anticipate reaching 30 with a £35,000 salary, you’ll want the value of your retirement savings to be about the same amount.
You will most likely start your first job in your 20s. If you work for a company, they will enrol you in a workplace pension. You can choose to opt out, but my advice is to stay in. As hard as it may feel to get started, your future self will thank you. And you will have more years to benefit from that magic ingredient: compounding.
Long term financially planning starts with an awareness of what you earn, spend and keep – and therefore are able to grow.
Go through your bank statements and direct debits and make a list of ‘necessities’ and ‘non-essentials’ and really ask yourself if you truly need everything, such as Netflix/Spotify subscriptions and memberships. One thing coronavirus has shown up for many people is where they can make cut backs in their life – for example eating out less, or home workouts vs gym memberships.
These sacrifices aren’t forever and will help you get an early start in reaching your long-term financial goals.
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In your 30s…
By the end of your 30s, you should aim to have a pot that’s equal to three times your annual salary. At this time of life, you may be tempted to postpone pension saving – especially if you have kids and a mortgage. But if you have the discipline to stick to your savings plan, you will have more chance of creating your dream retirement.
By now, you will understand the benefit of tax relief on contributions. A basic rate taxpayer gets an extra £25 for every £100 they save into their pension, thanks to tax relief. Your employer will also be contributing to your pension and may even match your extra savings. Free money – what’s not to like?
As your investments will be locked away for decades, they will have more time to recover from market falls, so it’s worth thinking about investing in riskier areas where the long-term return potential is greater.
Make sure you are checking in with, and making the most of, your workplace pension. When you start at a new company or when your employer sets up a new pension scheme, you will usually receive information to agree the percentage of your salary that will be paid into your workplace pension. Your employer will then deduct your pension contributions directly from your wages before paying you.
It’s important to check your pension to make sure you’re saving enough for retirement and you’re happy with how your pension is being invested. It’s also worth checking whether your employer will match £1 for £1 any personal contributions you make, a benefit you can consider as a pay rise to your future self.
In your 40s…
Your savings goal should be equal to six times your annual salary by the time you turn 50. Earnings often peak in this decade, giving you the opportunity to take advantage of greater financial resources at your disposal. Can you use your ‘fabulous forties’ to make bigger strides towards your retirement target?
You have seen your savings grow and understand the magic of compound interest. You have experienced investing for over 20 years, through different market conditions and hopefully in a well-diversified portfolio that has helped grow and protect your money.
Invested and managed with help from your financial adviser, you can see how you could potentially double your pension pot every decade, despite the ups and downs of financial markets. This is why a pension fund is a great way to save and invest – you can’t touch it until you retire.
One way to help you hit your long-term goal of a pension pot ten times your annual salary is by swapping what you’d spend on a latte every morning and saving and investing that money in your pension.
Contributing £100/month to your pension (roughly your daily coffee habit), including NI equates to an annual personal pension contribution of £1,320 – £13,200 over a decade – or £20,000 if invested with the long-term in mind. If you are a high-rate tax payer the benefit is even greater.
Keep up this good habit for the rest of your career (20-25 years) and through the magic of compound interest and tax relief, that £20,000 could grow to over £100,000.
In your 50s…
You should aim to have saved the equivalent of eight times your annual salary by the time you turn 60. With retirement nearing, now is the time to make more specific plans. How much will you need to retire? Have you got enough money to live off? Do you need to save more and work a bit longer to get there? Factor-in how much state pension you could get, and when you could get it, by using the government’s online service.
Once you hit retirement, just having a pot of money is not enough. You need to plan carefully to make sure it lasts the rest of your life ahead of you. Investing during retirement is a whole different ball game than when saving up for it. Instead of investing into a pot that is increasing month by month or yearly as you top it up, it’s now decreasing each month, year by year, as you take money out to support your lifestyle. That’s the first challenge. Then there’s the sequence of returns to take into account – i.e., when exactly your investments deliver for you.
In retirement, you need to make steady returns each year by investing into the right portfolio; a combination of funds that have been designed to mitigate these risks.
How can I make my pension go even further?
Did you know your money can be a force for good? Money makes the world go round and when you invest in your pension, you are investing alongside side millions of other people. This amounts to billions of pounds. Your pension is being invested in companies around the world and how these businesses behave has a huge impact on the wellbeing of our planet.
Did you know that investing your pension in a sustainable and responsible way is 27 times more impactful for the environment than flying less, eating less red meat or cycling to work? So, for a comfortable retirement in a world worth living in, go and ask your HR department how your pension provider invests your money, and if they’re not already, ask that they invest it responsibly.
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