It is fair to say that conventional wisdom states you should start saving as early as possible for your retirement. The reality, of course, isn’t always the case.
For many of us, “life” gets in the way of investing in our twenties and thirties. Salaries tend to be low for most people as they embark on their careers, and the cost of rent (assuming you live away from home) can be a big drain on what little money you have coming in.
During this stage in your life, what little you have to save, you understandably might want to put towards a house deposit rather than a pension. By the time you are on the housing ladder, perhaps you are in your thirties and you now have the cost of a family taking over.
As a result, it isn’t uncommon for people to reach their forties and suddenly think: “I should probably start thinking about retirement!” At this point, of course, many of us hear the message that we “should have started saving in our twenties” and wonder if it’s all too late.
Naturally, the ideal scenario would be to start putting money aside as early as possible but it is certainly never too late to start investing and saving for your future life after work.
In this article, we’re going to suggest some ways to “catch up” on your retirement savings if you have missed out on previous years. This content is for information purposes only and is not financial advice, so best to speak to us further for specific guidance on your own situation.
Look at the positives
Whilst you might feel disheartened that you didn’t start saving sooner, consider the strengths of your current position. In your forties, for instance, your salary is likely to be much higher than it was when you first started working in your twenties. This means you have more money to potentially commit towards a pension if you have spare funds available.
Also, it is quite likely that your outgoings are not as high as they could be. Admittedly, you will have a mortgage or rent to pay, and possibly children to look after. However, for many people, the children are older at this point, which allows more freedom for two parents to work and increase their household income.
Moreover, if you are now on the property ladder then you presumably no longer need to save for a deposit, which was previously hindering your ability to build up your pension in your twenties.
Take a look at the longer-term picture. The reality is, most of us are now living longer, which means we all are likely to need larger pension savings compared to previous generations. However, it also means that you could still have more decades in which to build up your pension pot.
For instance, if you recently turned forty years old, then your retirement age (under the current system) is likely to be sixty-eight, which gives you potentially twenty-eight years of work, during which time you can build up your retirement savings. This is a good length of time, assuming, of course, you are fortunate enough to remain in good health and in employment.
Draw up a plan
Let’s continue to assume that you are forty; that you have no retirement savings; that you have two children in full-time education and that you are slowly paying off your mortgage.
How much will you need in retirement, and how much will you need to start saving to get there?
Here, it is usually helpful to draw up a plan and perhaps discuss with a professional financial planner, who will be able to present you with some options. However, it’s also a good idea to start thinking about things yourself, to at least get you started.
Begin by looking at how much you are likely to need in retirement. A general benchmark is to assume that you will need at least £18,000 per year to cover the essentials, and at least £26,000 to live more comfortably in retirement.
So, how can you start to work towards this? Firstly, look at your State Pension. In 2019-20, the most this will give you is £168.60 (about £8,767.20 per year). To be eligible for this, you need at least thirty-five years of qualifying National Insurance Contributions (NICs).
Are both you and your spouse/partner on track to achieve the thirty-five qualifying years? Together, that would generate £17,534 per year in today’s money and achieves a large percentage of your target. (Bear in mind, however, that you cannot “inherit” your spouse’s/partner’s State Pension when they die, so this would dramatically reduce your retirement income from the Government).
For the rest, you will need to make up the difference with your own saving and investment plan. So next, look at your workplace pension.
Some employers offer very good pension schemes, which can enormously boost your retirement savings. Under Auto Enrolment rules, employers must contribute at least 3% of your eligible earnings towards your pension pot. You need to put in at least 5% of this yourself (of which 1% is made up of tax relief) making a total of 8% in pension contributions each year.
You will need to do some careful planning to see whether these current levels of contributions will get you to where you need to be in retirement.
For instance, 8% of a £40,000 annual salary, is £3,200. Broadly speaking, over say twenty-eight years, achieving an estimated 7% annual investment return, this would generate a £267,252.92 pension pot.
This sounds like a lot of money and it’s certainly a good start. However, it is quite likely that you will need significantly more to attain a comfortable retirement income, and also counter the eroding effects of inflation. If you would like help in devising a plan for the future, please do get in touch with us as we can help you cover all the necessary bases.