“How much should I be saving?”
This is the most common question people have about personal finance. Whether taking out life insurance, critical illness insurance, saving for retirement, or buying lotto tickets, ‘how much?’ is the first question that comes up.
Well, if you are thinking about saving for your retirement, look no further than this esteemed column. This week, those nice people at Scottish Widows (SW) have stepped in to help, by publishing their ‘Retirement Report 2019’.
The Pensions Commission recommends that we aim for a pension income that is between 50 per cent and 80 per cent of our working wage at the end of our career. Of course, we’re taking a cut on our full wage, but they say that alongside the drop in income come many cuts in our outgoings. We may, for instance, no longer have a mortgage to pay, we may no longer need to pay as much for transportation costs. How far do you live from your office? Will you still be wanting to visit them every day?
In order to plan for that level of income, the magic number they believe we should be saving today is 12 per cent of our wage, which they describe as ‘saving adequately’.
But that’s only the minimum recommended – some of us may need significantly more. If, for example, you never did buy your own home, but rented during your working life, then those rental payments may continue when you’re retired. Then there are possible healthcare costs – at 65, (Lord, keep it far from me) there’ll be none of us as young as we used to be. If you will have additional costs in retirement, Scottish Widows suggest a lifelong savings level of 15 per cent as ‘a sensible goal for most people’.
Sensible. That made me smile. Scottish Widows went into business on January 2 1815. That’s five months before the Battle of Waterloo. About 204 years on, they still think people have a bit of sense. If they did, we’d be out of a job.
The good news is that, thanks to auto-enrolment into a workplace pension, which was gradually introduced for all between 2012 and 2017, far more people are saving, these days. Since April this year the minimum amount saved is 8 per cent of salary, of which you pay 5 and your employer pays 3.
To be eligible for auto-enrolment, you have to meet the following criteria: you have to be at least 22, but not yet at pension age, and you have to be earning £10,000 or more a year in the company.
Now, the 8 per cent falls well short of SW’s recommended saving levels, but it’s just the legal minimum, and many people are opting to save much more. In fact, 59 per cent of UK workers are now ‘saving adequately’, compared with just 49 per cent in 2012, when auto-enrolment began.
We have often said in this column that in pension saving, or any long-term saving for that matter, it’s the first £1 you put in that works hardest for you. The interest compounds over time i.e. your pound attracts interest, and the following year you get ‘interest on the interest’. No less a man than Albert Einstein, when he wasn’t sorting out the universe, took time out to say that compound interest is ‘the eighth wonder of the world’, adding that if you’re smart, you earn it, if you’re not, you pay it.
Well, to get that first pound working hardest for you, you have to start your pension at the start of your career – the earlier the better.
Here are some new numbers from SW that will make your toes curl. If you are 25, all you have to save, in order to have £1,000 at age 65, is a once-off lump sum of £142.
If you leave it until 35 however, that lump has to be £231. If you leave it to 45, the sum you need is £377, and by 55, you need to put in a whopping £615.
As a general principle, the less you save when you are young, the more you need to pour in to make up for it in later life.
So the first rule for successful pension saving, and a comfortable lifestyle when you retire, is ‘save early and often’.
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information is on the Facebook page 'Kennedy Independent Financial Advice Ltd and the website www.mkennedyfinancial.com
