Plenty of people are worried about the prospect of living on the State Pension, and understandably so. It just isn’t enough to give you a comfortable retirement. This year you get a maximum of just £8,767.20, roughly a third of the average full-time salary.
The only sensible thing you can do is stop worrying and start saving under your own steam instead.
However, retirement planning can seem complicated at first, and many simply don’t know where to start, according to new analysis from fund manager Fidelity International. The following three steps should get you there.
Step 1: Work out how much you need to retire
Many people have no idea how much they need to save to guarantee a comfortable retirement. Fidelity has produced a pretty sensible rule of thumb, which suggests that you need to invest seven times your annual household income by age 68 to maintain a similar standard of living in retirement as you enjoyed in your working life.
Simply take what you are earning now, multiply it by seven, and you have your answer. If your household income is £50,000, then you need £350,000, and so on. It should only take a few seconds to find out what you should be aiming for.
Step 2: Calculate what you should be saving
The next step is working out how much you need to put aside every month to hit your target. Fidelity suggests you aim to put away at least 13% of your income before tax, every year between the ages of 25 and 68. For somebody earning £30,000, that means £3,900 a year, or £325 a month.
That looks a pretty tall order, but it may not be as daunting as you think. If you are in a workplace pension, you are already investing 8% of your earnings (4% from your own salary, 3% from your employer and 1% tax relief).
You can make up the 5% shortfall, say, by investing in a personal pension (and claiming tax relief) or taking out a tax-efficient Stocks and Shares ISA.
Don’t hang around, because if you don’t start saving until your 30s or 40s, you will have to save a higher percentage of your salary to retire comfortably at 68.
|
Starting age |
Saving rate |
|
25 |
13% |
|
30 |
15% |
|
35 |
18% |
Step 3. Check how long your savings will last
Let’s say you have built a decent-sized nest egg. You then face one final challenge: making it last throughout your retirement. This could be a tall order; at age 68, you could easily live for another 20 years or more.
Fidelity suggests the maximum you should withdraw from your pot in any year is 5%, ideally less. So if you have £300,000, the maximum you should take is £15,000 a year. Others follow the 4% rule, which would reduce that to £12,000. Remember, you will have the State Pension on top, and maybe other sources of retirement income.
If you limit withdrawals to that level, possibly taking less in years when markets are falling, your pension should last as long as you do.
For those who are still confused, I would simplify matters even further. How much should you save for retirement? As much as you can afford, as early as you can. Good luck!
