What will you be doing this time next year? Will you still be at your desk counting the days until you finish for the Christmas break? Having to work between Christmas and New Year?
Or will you have…. retired? Doing your Christmas shopping at leisure and avoiding the crowds? Maybe even lazing on a Caribbean beach somewhere?
The second list may sound idyllic but it won’t just happen through wishful thinking.
To be able to retire in confidence and know you have enough money to last, takes careful planning. You may need to think again about how much you’re paying into your pension. You may need to make sure your investments are working harder.
Auto enrolment into workplace pensions has certainly helped increase the number of people actively saving but many individuals still greatly underestimate the amount they’ll need to live their preferred lifestyle in retirement.
Think about your ideal retirement age
Consider in detail how long you would like to go on working for? It’s a personal decision. Some people can’t wait to give up work. Others worry about what they will do without the structure and camaraderie of the workplace. But think about what’s right for you. Do you still see yourself commuting to the office each day at 55…. 60…. 65? Or, if it were possible, would you rather be doing something else?
How much will you need?
Once you’ve thought about your ideal age to stop working, think about how much your annual income will need to be in retirement. As a general rule of thumb, experts say that you will need between a half to two thirds of your salary before retirement to maintain your lifestyle.
You may well need less to live on at that stage of your life because you could have paid off your mortgage, your grown-up children may have left home and you will no longer have any commuting costs. In retirement, however, you will no doubt want to take advantage of your new found freedom and spend more money on holidays and travel. Later on, you may need to make provision for health-related expenses or care costs.
The consumer group Which? estimate that £18,000 is required to cover essentials such as foods, utilities, transport and housing. If you add in holidays and other luxuries such as a new car every five years or long-haul trips abroad, this would rise to between £23,000 and £27,000. To generate an annual of income of £26,000, for example, Which? state a couple would need a defined contribution pot of £210,000 in today’s money, in addition to their state pension entitlement.
How much do you need to save now?
This is where compound interest kicks in, depending on your age. Calculations by pension provider, Scottish Widows, show if you start saving into a pension at age 25, you will need to put aside £293 a month for an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4 per cent, plus the state pension. This allows for inflation and assumes your contributions would increase in line with your salary. Of course, if you left it longer before starting to save, you would need to put away a higher amount each month to enjoy the same annual income in retirement - they quote £443 per month if you start at age 35 and £724 at 44. If you’re self employed, you will not benefit from employer contributions so will also need to save more.
Review, review, review
The figures above show why putting a plan in place becomes so crucial. ‘Knowing your number’, the overall pension pot you will need to achieve your desired annual income, will put you in control of your financial future. It will give you the assurance that you won’t run out of money, whatever happens, and will give you a clear retirement date to aim for.
When you’ve done all your calculations, make sure you review your plan on a regular basis. Consider whether your circumstances have changed at all. Have the rules regarding the state pension changed? Are your investments on track?
Who knows? This time next year, you could be enjoying the Christmas you’ve been dreaming of (white or otherwise).