It can be difficult to know exactly how much to save for retirement, especially when it’s hard to predict how much money you’ll spend each year and how many years you’ll live.
Let’s look at just a few things to take into account when planning how much to put in your pension pot.
As obvious as it may sound, if you want to spoil your grandchildren, shop at the posher supermarkets and enjoy two beach holidays and a cruise each year, you’ll need more money than someone who is content maintaining a relatively modest and frugal lifestyle. So, when thinking about how much to save, take your ideal retirement lifestyle into account.
According to figures from Aviva, at the least, a pensioner needs a basic annual income of £12,590 a year, or £242 a week, to get by. The state pension can help somewhat towards this figure, but you’ll need to save the rest (multiplied by the number of years you may live) during your working life.
With it being impossible for most people to predict how long they’ll live after retirement, many pensioners use their pension pot to purchase an annuity to ensure they have a guaranteed income until they pass away. We advise researching your annuity options thoroughly to ensure you purchase one that is designed for you and takes any illnesses you may have into consideration.
If you’re a homeowner and it’s looking likely that you’ll have paid off your mortgage by the time you retire, this could reduce the amount you need for retirement.
In some cases, you may end up better off financially if you prioritise overpaying your mortgage over putting money in savings. Of course, you’ll need some money in a savings account so that it can be accessed in an emergency, but with the interest on mortgage debt often exceeding the amount of interest you can earn on savings, this can sometimes be a wise financial move.
Before doing the above, it’s wise to consult an experienced and reputable financial advisor to find out which move is best for you.
Typing your details into an online pension calculator can be a great way of working out how much you need to save for retirement.
Using Pension Bee’s calculator we worked out that a 30-year-old who wishes to retire at 70 could end up with an annual salary of £11,280 if they contribute £150 into a workplace pension each month. This assumes they have no pension savings prior to the age of 30 and their employer adds £50 a month. With the state pension added on top, this annual salary would increase to £19,576.
Most online pension calculators make several assumptions before giving you a total salary. For example, it may assume a particular investment return and annual inflation rate. Be sure to check these assumptions when doing your calculations.
Some financial planners recommend saving 15% of your income while others recommend saving 20%. There are also financial advisors who advise saving half your starting age as a percentage. So, if you start saving for retirement at 24, you need to save 12% of your income. If you start saving at 30, you need 15%. If you start saving at 50, you need 25%.
Although the above suggestion is a helpful way of reiterating the value and importance of saving sooner rather than later, it can be a little intimidating for those who would struggle to save at this rate.
So, if the above figures seem unrealistic to you, just start saving whatever you can and as soon as you can. Compound interest can work wonders for your pension, so by saving sooner rather than later, you give your pension pot more time to accumulate interest.