How much do you need to save to be able to enjoy a financially comfortable retirement? It’s the golden question. Too many people underestimate what they’ll need to retire, then realise when it’s too late…
Wondering how much to invest during your working life is something that most people ponder at one time or another. Lifestyles change, that ‘wish list’ gets longer and you never know how much things will cost in the future.
This all makes deciding what percentage of the monthly salary should be saved a very tricky task. For self-employed people it’s more challenging, as they will not receive employer contributions.
You could go over the top and tuck the maximum amount into your pension savings each month. But what about other expenses, the unexpected bills and those occasional luxury purchases?
Commit too much to monthly pension savings and those others purchases might become unaffordable as prices increase and wage rises fail to materialise!
What lifestyle do you want?
Most agree providing for your retirement years is all about planning, balance and taking a sensible approach to life after work.
Do you think you’ll spend the same in your 60s, 70s and 80s as you do now?
It’s a serious question. Your needs will change over time. If you have a mortgage, there’s every chance it will be paid off by the time you retire. Hopefully, you won’t have other debts.
How about the car you and other family members drive? If you’re a couple, will you still need two cars if neither of you have to drive to work each day?
And then there’s the children. They will probably have flown the nest when you reach a pensionable age. You are likely to have already helped them out with college expenses and with that first car purchase.
So there are many costs that are likely to be much lower when you do finish work.
How much income do you need to retire?
Producing a monetary figure involves many variables. There is no magic number, so when you see reports that a £250,000 pension pot might be enough you really must think about what your commitments are likely to be many years down the line.
We’re all different, but it’s always good to look at average income requirements from similar people in the same country.
Some great research by consumer group WHICH? identified two key figures. They found that couples who retire and want to enjoy a luxurious lifestyle during retirement will need around £39,000 of income each year.
For the purpose of the WHICH? report, the term ‘luxurious’ includes long-haul holiday flights, new car purchases and additional leisure memberships.
A ‘comfortable’ retirement will need an income of around £26,000 per annum. That’s a sobering thought, as for people without additional pension income the combined state pensions for a couple wouldn’t achieve half that amount.
When should you start saving for a pension?
There are always options to consider no matter how late you leave it to start saving into a pension scheme. The earlier the better, obviously.
Thankfully, if you have time on your side, there’s good news. The power of compound interest means that anyone who starts saving into a pension at 25 years of age will need to invest much lower amounts each month to achieve a ‘comfortable’ retirement income.
Information from Scottish Widows reveals that people who begin saving into a pension from 25 will need to save nearly £300 each month to enjoy an annual income of £23,000 during retirement. That figure is based on someone earning a salary of around £30,000 a year, and assumes that employer contributions are 4%, and that the recipient will also get the standard state pension.
For people who put off saving until a later date, the news is not so good. If you wait until you are 35 years old, to achieve that ‘comfortable’ retirement income you will need to save about £440 a month, while at 45 years of age the figure rises to an eye watering £724!
There’s a clear message; to retire when you want, if you can start saving early then do it.
If you are at a later stage of life and want to look at pension and other investment options to fund retirement, take some independent financial advice.
Logic Wealth Planning always starts the process with a series of questions to understand what you want from life. Only then can the financial planning begin.
If you’d like some help considering your future income requirements, get in touch.
Call us on 0808 1234 321 or email firstname.lastname@example.org and we’ll do the rest.