Robert Gardner write for St James's Place Wealth Management with some helpful tips. How to plan for your retirement through the decades
Sharing some advice on how to save for a pension in your 20s, 30s, 40s and 50s.
I’m often asked, “How much do I need to retire on?” It’s a question many people struggle with, but I always recommend starting with the end goal in mind. Once you are clear on how and when you want to retire, you can work backwards to calculate how much to save.
A good rule of thumb is to have a pension pot worth about ten times your annual salary by the time you retire. That may sound like a lot to save. But, like every big challenge, it's about breaking it down into simple, actionable steps.
The most important thing is to start early. The earlier you start putting money away, the greater your chances of building a pension pot that can last the rest of your life.
In your 20s
You should aim to have saved the equivalent of your annual income by age 30. So, if you anticipate reaching 30 with a £35,000 salary, you’ll want the value of your retirement savings to be about the same amount.
You will most likely start your first job in your 20s. If you work for a company, they will enrol you in a workplace pension. You can choose to opt out, but my advice is to stay in. Even if you start off by saving £5 a day, this could equate to over £10,000 in five years, assuming a 5% return*. This can include money from your employer and the taxman.
As hard as it may feel to get started, your future self will thank you. And you will have more years to benefit from that magic ingredient: compounding.
In your 30s
By the end of your 30s, you should aim to have a pot that’s equal to three times your annual salary. At this time of life, you may be tempted to postpone pension saving – especially if you have kids and a mortgage. But if you have the discipline to stick to your savings plan, you will have more chance of creating your dream retirement.
By now, you will understand the benefit of tax relief on contributions. A basic rate taxpayer gets an extra £25 for every £100 they save into their pension, thanks to tax relief. Your employer will also be contributing to your pension and may even match your extra savings. Free money – what’s not to like?
As your investments will be locked away for decades, they will have more time to recover from market falls, so it’s worth thinking about investing in riskier areas where the long-term return potential is greater.
In your 40s
Your savings goal should be equal to six times your annual salary by the time you turn 50. Earnings often peak in this decade, giving you the opportunity to take advantage of greater financial resources at your disposal. Can you use your ‘fabulous forties’ to make bigger strides towards your retirement target?
You have seen your savings grow and understand the magic of compound interest. You have experienced investing for over 20 years, through different market conditions and hopefully in a well-diversified portfolio that has helped grow and protect your money.
Invested and managed with help from your financial adviser, you can see how you could potentially double your pension pot every decade, despite the ups and downs of financial markets. This is why a pension fund is a great way to save and invest – you can’t touch it until you retire.
In your 50s
You should aim to have saved the equivalent of eight times your annual salary by the time you turn 60. With retirement nearing, now is the time to make more specific plans. How much will you need to retire? Have you got enough money to live off? Do you need to save more and work a bit longer to get there? Factor-in how much State Pension you could get, and when you could get it, by using the government’s online service.
Enjoying your retirement
Hit those near-term milestones and you’re setting yourself up to build a retirement fund worth about ten times your annual salary as you head into retirement.
Now it’s time to start thinking about your income strategy. Get some financial advice on how to draw your pension in a sustainable and tax-efficient way. Consider the needs of others. Do you need to provide for a spouse, civil partner or dependant? I would urge everyone to ensure that they have a valid Will in place.
Think about how you want to enjoy the money you’ve saved. Will you travel more? Create a spending plan that works for you. Most of all, enjoy your retirement!
*This figure is only an example and is not guaranteed - it is not minimum or maximum amount. What you will get back depends on how the investment grows and on the tax treatment of the investment. You could get back more or less than this.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
The writing of a Will involves the referral to a service that is separate and distinct to those offered by St. James's Place.St James's Place - How to plan for your retirement.