When you’re in your 20s, retirement can seem like a lifetime away – which is why “I’m too young” is one of the most common excuses people make to avoid saving for retirement.
Anyone nearing the state pension age, which has recently gone up to 66, will tell you time that flies and building a sizable retirement pot becomes more and more difficult as you grow older.
Over time, you may acquire some extra expenses you are not thinking about right now, like the cost of starting a family and repaying a mortgage, which may hinder your retirement savings.
And although you may not have a huge amount to splash on your pension and it might not be your main priority right now, you have the advantage of time, unlike many people of the older generation. With this time on your hands, saving for your retirement can become less of a draining prospect.
For example, let’s say you start making monthly contributions of £200 to your retirement pot at the age of 53, and your employer contributes £120.
Assuming your fund performance is 6%, inflation remains at 2% and you pay charges of 0.75%, this could give you a total pension pot of £54,795.95 at retirement age, according to the Which.co.uk pension calculator.
In comparison, if you started making the same deposits to your retirement pot from the age of 23, your pension could reach £255,125.77 by the time you retire.
And even if you and your employer made half the amount in contributions, at £100 and £60 a month, you could still hit a total pension pot of £127,562.89 by starting to save earlier.
Here are our top tips to help you save for your retirement.
Stay in your workplace pension scheme
At the age of 22, you should automatically be enrolled in your company’s pension scheme if you earn over £10,000 a year.
Between the age of 22 and retirement, a percentage of your wage is placed into a pension scheme automatically, with your employer offering a minimum of 3%. The combined minimum contribution for employers and employees is currently 8% of your earnings, so if your employer pays the minimum, you’ll pay 5%.
Although you are automatically enrolled, you can choose to opt out of your pension scheme – but it is generally better to stick with it, as it gives you the benefit of tax-free savings and employer contributions.
Increasing your savings over time
The sooner you start saving for your retirement, the better. As you start out in your career, however, you might not have a lot to put away for your retirement.
Making minimum contributions to your pension is the best option when you’re starting out, and if you can afford to put away more, feel free to do so. But as your career progresses, remember to grow your retirement pot accordingly.
Setting targets
When planning for your retirement, it is crucial that you set yourself realistic goals. There is no point saying to yourself that you want to save £1,000 when you earn a monthly wage of £1,200.
Take out an hour of your day to go through your bank statement and create a spreadsheet of your outgoings. See what you can cut out and put that towards your retirement fund.
Also, think about the retirement you want and the lifestyle accompanying it. Which expenses are for things that you need in retirement, and which ones can you live without?
Saving small amounts now
You may be thinking you have all the time in the world when saving for your retirement – you have your whole life ahead of you, right? That’s partially true, but why refrain from saving for tomorrow when you can start today?
When you save into a workplace pension, contributing a small percentage of your wages over time brings you the benefit of tax relief, employer contributions and the compound effect of long-term saving, giving your investments more time to grow.
With a traditional savings account, you will miss out on these extra contributions, and with interest rates plummeting amid the ongoing pandemic, it is extremely unlikely that your saved money will keep up with inflation.
Whenever you decide to start putting money towards your retirement, it is important to understand why you are putting this money aside and the lifestyle you’re aiming to achieve.
Bulley Davey Wealth Management is your partner in life. Whether you need to discuss your retirement saving options or your income during times of uncertainty, we put your needs first.
To discuss your options, give us a call on 01775 718850 or email bdwmadmin@bulleydavey.co.uk