Your money-making expert. Financial journalist, TV and radio personality.
Planning for retirement can seem like a daunting prospect with so much to consider. But building up a nest egg needn’t be an unnecessary stress whatever your age.
Here are some tips for putting your money to work wisely and future-proofing your savings with easy and safe investments as well as tips for your timeline.
The first step to truly being able to plan for retirement is to understand how much the average person needs to save for a comfortable future.
According to Retirement Living Standards, a couple needs £49,700 per year for a comfortable retirement, while singles will be looking at an income of £33,600 per annum. This all also depends, of course, on where you live and what you deem “essential”.
Take a look at our article that explains how much you need to have saved into a pension for more on this point.
Individuals get just over £9,500 a year from the full State pension at the moment (that will change over the years of course) so if you’re about to retire you can factor that in to your annual income. However, even to get another £10,000 a year in income from your investments, assuming a 3% return (which is a fairly safe assumption at the moment) you would need a retirement pot of at least £250,000.
One way to calculate how much you might need in retirement is to follow the “multiply by 25” rule.
This is a a simple principle — you just need to multiply your desired annual income in retirement by 25. This will bring you to an approximate figure for how much you need to save.
Experts at the Motley Fool website say that the issue with this rule is that it doesn’t take into account income tax or State Pension payments, so it’s not an exact science. They found that when you include the State Pension, a couple would need to save around £430,820 in order to retire comfortably — a figure that still ignores income tax.
There is evidence to suggest people are not saving enough at current levels with their automatic pensions contributions.
Recent research released by the Pensions and Lifetime Savings Association (PLSA) showed that if the level of automatic-enrolment contributions is not raised, only about half of people eligible for workplace pensions will achieve the 2005 Pension Commission’s target retirement income replacement rates.
The PLSA has argued that the level of automatic enrolment contributions should be increased from today’s under 8% up to 12% by 2030 – split 50/50 between employer and employee, that the State Pension Triple Lock should be retained, and that the current level of fiscal support for pension saving should be maintained.
Also, on the basis of independent research by specialists in this area at Loughborough University, they argue for setting out three Retirement Living Standards – Minimum, Moderate, and Comfortable – to support people in understanding how much different lifestyles cost in retirement so as to help people identify their own definition of pension “adequacy”.
Once you’ve understood how much you might need from retirement age you have to look at your timeline to achieve that, too.
You can never start saving too early. How much money you will need for an estimated number of years can be hard to calculate, but there are steps you can take as you enter different phases of your life.
If you start thinking about saving in your 20s, you could benefit from looking at more long-term savings plans which could yield better returns in the long run.
Also, even if you’re only contributing a small amount each month compound interest will be on your side.
Really, you could put in a tenner a month and, thanks to compound interest over decades, it would still create a really decent pot for you when you come to retire.
It’s also a really good idea to join your workplace pension as you then get ‘free money’ from your employer, plus the tax back from the Government that all pension schemes get.
If you’re self-employed you just get the tax advantage but it’s still worth having.
Making smart choices early on will set you up well for later life and might even lead to you being able to take early retirement.
It’s also really worth considering taking out a LISA (Lifetime ISA) as the Government adds another 25% to anything you put in (you can deposit up to £4,000 a year into one of these).
In your 30s you’re still young enough to make a significant dent in what you’ll need to save to retire comfortably.
As it stands, you’ll have 38 years to go until you reach State Pension age and a lot of time to gain a good savings pot from workplace pensions, where employers contribute a minimum of 3%.
Alongside this, you might think about building up value from other assets, such as a house, to boost retirement value.
Again, don’t forget the LISA which will help you put a deposit on a home or contribute towards your retirement.
In your 40s you might be established in your career and on a better earnings track than in your 20s and 30s. So this will free up more money for later on in life.
If you start saving for retirement in your 40s, you’ll have to look at putting more into your pot each month than you would have if you’d thought about it earlier on.
You’re also more likely to be on the housing ladder and can consider using your property to help fund your retirement later on. However, it’s much better, on the whole, to have investments separate from your home, so make some time to really look into good places to help your money grow.
In your 50s you might want to seriously look at how much you have and think about at what age you want to stop working….assuming you do want to stop working.
You might also want to look at how you could go about taking your pension out of the pot, be it with annuities, a drawdown or a lump sum, now or later on
Also check to see that you have paid enough NI over your life to qualify for the full State pension. If you haven’t, you are allowed to pay for some years in some cases, and it could be a good idea to do that. Check your State pension age too.
When you’re in your fifties you qualify for a free advice session with Pensionwise. It’s worth getting that so that you can have a good idea of what money you can expect to make in retirement and, also, whether you need to put more aside now in order to fund yourself later on.
It’s also a good idea to pay for independent financial advice at this stage. It’s about funding the rest of your life so you need to get it right. Find a recommended financial advisor here at VouchedFor.
In your sixties you could still be working or you may have already taken early retirement if you have the cash to do it. Check when you qualify for the State pension and remember that you have to actually apply to receive it. It doesn’t come automatically.
It’s also a good idea to consider putting off your State pension by a year. You can get more per year by doing that and, if you think you’re going to live a good, long life (and why wouldn’t you?) then that’s worth considering.
Nowadays more people are choosing to reduce their working hours and opt for semi-retirement first, rather than give up work completely. Many people enjoy working in retirement. Why shouldn’t you keep in ‘life’ by working rather than staying at home?
If you’re looking to find a side-earner to supplement your income before or after pensionable age, we have loads of ideas in the Make Money section so take a look there.
This is also the time of life when you should consider the exact circumstances of your retirement living situation. Will you make do at home, downsize, or look into moving into a retirement village? You should consider options for retirement villages such as Living Choice so you can find the perfect location to spend your golden years. Think very carefully about this decision, making sure to read all the fine print. You should also ensure that the village you set your heart on has all the important amenities you need to thrive.
You might want to look into getting help from a financial planner or financial advisor to understand the investment options that will best help you retire with a healthy savings pot. Doing this earlier can mean your money is put to work in more productive ways from the get go.
Find a recommended financial advisor at VouchedFor.
It can be confusing to know exactly what you have from the different pots available. Here are a few ways to check your pension annually.
It’s a good idea to regularly request a State Pension statement so you can see how much State Pension you’ve built up so far.
You can apply for one online or by phone or post if you are aged 16 or over and at least 30 days away from your State Pension age.
You’ll find details about how to do this at GOV.UK
Final salary pensions pay a retirement income based on your salary and the amount of time you’ve been part of the scheme.
It’s generally only public sector or older workplace pension schemes that offer DB pensions, and members of one will usually be sent an annual statement by the scheme.
If you don’t receive this, you can request it.
The statement shows how much pension you might get. It might assume that you take your tax-free cash lump sum.
These schemes mean you build up a pot of money you can use to provide yourself with an income in retirement. The value of the pot is based on your contributions, your employer’s contributions plus investment returns and tax relief.
They can be run through an insurance company, master trust provider or you might be a member of a bespoke scheme set up by your employer.
Annual statements will give you an idea of the monthly retirement income you can expect. It might not assume that you take your tax-free cash lump sum, however.
In this type of scheme you have freedom over how you can access your funds if you’re over the age of 55.
Consolidating your pensions from different workplace plans can make it easier to know what you have in total. PensionBee is one company that does this, and they provide an easy to use platform for both choosing what type of pension you want and consolidating existing pensions.
Find out more about PensionBee and how you can retire early with this free eBook that we produced.
One way to boost your retirement income is to increase your regular savings early on.
Jasmine Birtles’ MoneyMagpie webinars are the perfect place to learn about investing from industry experts, and give you the confidence to start investing your cash. You will learn how to get yourself ready for investing, how to save and how to invest like the City guys!
You can bring any questions you like – none are too dumb – and Jasmine will also point you to websites and services that can give you more help and information.
Keep an eye out on the website or social media channels for what’s coming up next.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.