HOW much should I save for retirement? Well, the answer to that very much depends on your needs and lifestyle in retirement, and how that will differ from today.
A simplified approach is to look at what you are earning now and what you actually need to live on, ie after spending, what is left? If you exclude from the above spending the money you are saving for retirement, and any obvious bills such as a mortgage, a young family, you should be left with what you actually need to live on assuming your lifestyle remains the same.
That, of course, is where everyone is different. For some, its time to relax and enjoy the garden, for others its to travel the world in hotels, or the trusty camper van. All of the above have very different income requirements.
For example, the person who rents their house out, then travels the world in a camper van living off that rental income, has a significantly different requirement to the ‘four hotel holidays’ per year retiree.
Whatever your individual requirements, it is simply a case of calculating those numbers out.
YouGov has a pension calculator website that assists with giving guidance of this, and openly states that most visitors seek around 50 per cent of pre retirement income. I can’t see that myself, however, as it will be my bonus time to enjoy the hard earned years.
For some, you have the power of a final salary scheme, were the responsibility to provide the final fund to produce the income is in the hands of the employer. Such schemes have been known to take a company down given their costs, but their peace of mind is unquestionable.
Those outside of such a scheme have to save for their retirement in private arrangements, and are into quite complicated calculations to work out how much to save, where to invest etc.
Key questions to think about are: when you would like to retire; what income do you need; what will inflation be between now and retirement, as you will have to adjust your assumptions as you move along, particularly in periods of high inflation; what will inflation be in retirement; how much would you like your pension to increase in retirement; would you like to take a tax free cash lump sum in retirement; what state pension will you receive and when; how much net growth will your pension receive after charges, i.e. how badly, or how well is it invested?
You'll also ask yourself: would you like the pension to remain invested in retirement to assist with Inheritance tax planning and flexibility, and do you know what risk that means to the performance of your money; do you simply want to take a guaranteed income in retirement; what fluctuations are you happy with in your pension investment as it grows; do you wish to include your state pension in the calculations given the government’s continuous alterations and reductions to what is already the worst in the developed world; will you be retiring abroad, and what affect will that have on the increases to your state pension.
Clearly you can see from this, how important an independent financial adviser is, as each of those questions comes with a subset of questions, creating a complex decision tree, no robot can copy.
A study by AJ Bell calculated the pension requirements of a 65-year-old retiree who is currently earning £28,000, and wants £20,000 per year in retirement. The pot of money calculated to achieve that is £447,000, assuming they want that income to last until age 100.
Sadly, a survey of 40-60 year olds last year, showed an average pension pot of just £60,000.
An independent financial adviser will talk through each of the above questions, and then take your current pension pot, and work back what is needed to achieve the retirement you desire.
One thing for sure, each pound placed in your fund today has the longest to grow, so get going!
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary calculation of your pension, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.
