When you think about retirement, what do you see yourself doing? Watching the sun set from the deck of a cruise ship, having fun with family and friends, playing with grandkids? All of the above?
With good fortune on the health front, there’s no reason why you shouldn’t have years to enjoy who and what you love most, but financing maybe two or three decades of life needs careful planning. Pension shortfalls, shifting legislation, inflation and volatile markets can all impact your income in later life.
When you’re busy building a career, juggling kids and paying a mortgage, it’s all too easy to put any thoughts about saving for retirement on the backburner.
But the sooner you start building a pension pot, the easier it is to achieve the comfortable retirement we all crave.
The saving timeline
Starting early is the key to successful retirement planning.
Ideally, by the time you are 30, you should have saved the equivalent of your annual salary. We would recommend this figure is in some sort of long-term investment like a pension, but it can include ISAs and other forms of savings.
We recognise many people will fall short of this target, thanks to student loans, house prices and starting a family, but don’t become disheartened. Time is still on your side.
Let’s fast forward now to 40. By this point, we’d hope you are earning more and putting more into your pension. Again, a rough target would be to have a pot worth around twice your annual salary.
Please don’t panic if you haven’t saved this much. You still have time to make a difference to your pension. At this stage though it is worth talking to a professional planner about how your finances can be structured to help achieve your retirement goals.
The next target is to increase your pension savings to four times your salary by the time you turn 50. If you haven’t put as much aside as you would have liked, you can still make a material difference, but the clock is ticking. Significant change requires proactive financial planning and foresight.
At some point in your 50s, you really need to review the pensions you have accrued and how they are performing. If you’re someone who has changed jobs frequently, it may be worth consolidating your various pots. We can help you take stock and make the necessary updates to your retirement plan.
What does enough look like?
As a general rule of thumb, we planners expect you to need approximately 70% of your income before retirement to maintain a similar lifestyle once you stop work. Certain costs disappear, such as pension contributions and maybe your mortgage, which is why the amount is less than you earn now.
When trying to work out how much income you will need in retirement, ask yourself the following questions:
- What do you actually want to do with your time?
- Do you want more holidays?
- Do you want to downsize or release equity to help family?
If we can understand more about your aims and aspirations for retirement, we can forecast more accurately how much money you will need to make them a reality. Everyone’s circumstances differ, as does your ability to save, but the following example gives you some context.
If you were to need an annual retirement income of £40,000 per year, you might need a pension pot of roughly £800,000 to £900,000 by retirement. This assumes a long‑term, sustainable withdrawal rate of around 4-4.5%, designed to support income over 25 years or more.
Ultimately, what ‘enough’ looks like is a very personal thing. There is no right or wrong answer and a number of factors will affect your decision. They are:
- Retirement age – the earlier you retire, the longer your pension must last
- Lifestyle – you only need to afford the life you want to live
- Other sources of income – your state pension, investments, property and savings all impact how much you need to draw from your personal pension
- Inflation – rising costs can seriously dent your purchasing power
- Attitude to risk – your ability and desire to invest in riskier products can influence how they mature.
Keep track of your pension
It is really important to understand how your pension is performing, how much you are paying in fees and whether you are making the most of the tax relief it attracts. The latter makes pension saving a powerful tool.
For example, a basic-rate tax payer can see a contribution of £160 a month topped up to £200. Higher rate and additional rate taxpayers can save even more through their annual returns.
There’s no way to forecast exactly how much your pension will be worth when you retire. However, we use clever software to map out various scenarios that take into account underperformance in the markets, life expectancy and high inflation.
By looking at these different outcomes, we can build a plan that reflects your circumstances now and your aspirations for the future. And with regular reviews, you will always know where you stand.
Professional advice helps you stay one step ahead of the inevitable changes to pension rules. We don’t just point you in the right direction, we walk you through each step of your life until you finally reach your retirement goal.
To find out more about pension saving, or to review your current provisions with one of our expert team, contact us for a free initial consultation on (01246) 298181 or email: enquiries@belmayne-ifa.com
