How much should I be saving for my retirement?

on Nov 24 in 30s/40s , 50s/60s , My pension is fine , Near retirement , Sort it out tagged by Claire Brinn

You’ve read enough about the pensions crisis to be curious about your own … so how  much do you need to be saving to make sure you have a decent retirement?

There are several  different  approaches you may come across.  There are many on-line pension calculators that you can use.  These all have underlying assumptions about what investment returns are likely to be, levels of inflation and how long the average person might live.  Lots of people are put off by this and find it too complicated.  Our motto is always to err on the side of keeping it simple.  Why?  Well, that way you are more likely to do the calculation and take some action – which is what we are all about.

So let us suggest three simple approaches:

1. The 10% rule.

The recently launched pensions quality mark from the association of pension funds will be awarded to companies where at least 10% of employees gross earnings are going into a pension fund (with 6%+ being provided by the employer).   This is certainly a good starting point especially if you are in your 20s. Clearly if your employer has such a scheme it is in your interests to join and contribute enough to get the maximum employer  contribution.  Obviously the closer you are to retirement age , the more you will need to save, so in your 50s 10% is not going to be enough.

2. Half your age

A second option which we’ve spoken about in the book is to put aside half your age as a percentage each year.  So 10% if you are 20, or 20% if you are 40, and 25% if you are 50.  This is likely to be a better reflection of what you need at different stages. It also reflects the power of compound interest on your investments in that the longer your money is set aside the more it is going to earn.

3. 5%  interest

The final method is to estimate the annual income you will need in retirement and multiply it by 20 to determine the amount you need in your pension fund to retire.  For example, if you need an income of £50,000 then your fund needs to be £1,000,000.  The logic here is 5% (which is the same as 1/20th) is the rate of interest many financial advisers would recommend taking as income from your fund if you are looking to keep the capital intact for as long as possible.

So, three simple rules of thumb to give you a rough idea.  The next step is to run your own numbers and decide if you are on track.

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