Today we will be showing you what pension planning has in common with half a pound of sausages.
One of the most recurrent worries among pension savers is the nagging feeling that they are ‘saving blind’, with no idea how much their current saving will get them in retirement, and how much they would need anyway, to fund a decent lifestyle.
Every now and then some zippy new research pops up with estimates of how much you will need to retire in your late 60s, depending on the lifestyle you want.
These surveys are generally ‘there or thereabouts’ but most importantly, they bring home to people that your ‘pension pot’ – your total savings at retirement – probably won’t be giving you as much as you might have expected. In fact, some people nearly fall off their chair when they realise how wide of the mark their savings expectations have been.
However, we believe these unpleasant little shocks can be the best thing that ever happened to you - if they nudge you into finding out more about the largest and most important financial project you will ever undertake: saving for your future, and paving the way to be able to give up work someday.
We talked recently about figures provided by the researcher Unbiased, which indicated that 7 out of 10 people believed that pension savings of £100,000 would provide them with pension income of £20,000 a year.
In fact, it would give just £7,000 a year. Even taken together with a full basic state pension, if it is providing what it is today (and that’s a big ‘if’) it would get you to £16,110, still far short of your target.
To hit the magic £20,000 figure, Unbiased say you would need the full state pension (now requiring 35 years of National Insurance contributions), plus a pension pot of £170,000.
Are you saving enough now, to hit that level – or what is your target, and where will you be in retirement, based on what you are saving now?
These crucial questions are like a half a pound of sausages, because they have an ‘expiry date’ – asking them in 20 years could be too late.
You need to sort them now. (Obviously the half pound of sausages metaphor is for illustrative purposes only. This also applies to vegetarian savers.)
This month’s new research, by Which magazine, describes planning for your retirement as if you were buying a new car. It comes in both the ‘comfortable’ and the ‘luxurious’ models.
The ‘comfortable’ lifestyle covers all your essentials, plus an annual European holiday and running a car. What you may miss out on here are the extras included in the ‘luxurious’ lifestyle, such as long-haul holidays, regular eating out, and a new car every five years or so.
The general principle applies: if you put off starting saving, the monthly amount you need to put away goes rapidly up. Just look at Which’s estimates of how much you need to be saving.
The comfortable retirement requires £169,175 in your pension. As a couple, to achieve this you’d have to save the following amount (between you) per month, depending on when you start saving. If you don’t start saving until you’re 50: £647 per month; start at 40: £384 per month; at 30: £276 per month, and start saving at 20: £213.
The luxurious retirement requires £456,500 in your pension. As a couple you’d need to be saving – again, between the two of you – the following monthly amounts. If you start at 50: £1,735 per month; at 40: £1,030; at 30: £741 and at 20: £570. For most people, these are ridiculous and unattainable amounts, of course, but they do show how the price goes up, the older you get.
These guideline figures assume your marginal rate of tax is 20 per cent and that annual growth in your pension savings after charges is 3 per cent. These figures are also in today’s money, which would have to grow ahead of inflation to give you the same spending power when you retire.
Most important, they do show how crucial it is to sort your pension early on, in your 20s if possible.
So! Don’t open your financial fridge some day to be greeted by the delicate aroma of stale sausages. It’ll be too late by then.
Let us answer these important questions for you today!
Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com
