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How much should you save for retirement?

Whether you’re thinking about retiring in the next few years, or you’ve only just started your first job, saving for retirement is something we should all be thinking about. After all, everyone wants to ensure they have enough cash saved up to make the most of all that free time in the future.

If you’ve been working for a while, chances are that you’ve already squirrelled away a tidy nest egg for when you can put your feet up. But for those new to pension savings, or who maybe left their retirement planning a little bit late, finding the financial flexibility to start your retirement savings can be an intimidating prospect.

It goes without saying that knowing how much to save for your later life can be rather tricky, and learning how to invest for retirement on top of traditional saving methods is definitely a learning curve.

Fortunately, that’s where the team at Blacktower come in. We’ve broken down all the important areas you might want to consider when looking to save for retirement, including retirement investment options and pension planning, all so you can get the most out of your money and enjoy those hard-earned years with the people you love most.

How much do I need to save for retirement?

Unfortunately, there’s no definitive financial number we can provide you with for how much you’ll need to save each month and year to comfortably enjoy your retirement. Everyone’s retirement plans are going to be different, which means your saving goals will be unique to your circumstances.

For example, someone who plans to go on a lavish holiday every year will probably need a lot more saved in the bank compared to those couples who’re satisfied with taking the odd weekend away as and when they feel like it.

To get the best idea of how much you might need for your retirement, experts advise that you think about how you plan to do in later life, what level of comfort you want to be living in, and what unforeseen expenses might land at your feet.

However, with all this said and done, we can still provide you with a rough estimation of how much money you might need for each year of your retirement. In fact, the Pensions and Lifetime Savings Association (PLSA) suggests a range of savings that can account for the following standard of living levels:

  • Minimum savings – enough financial flexibility to cover bills and expenses with a small amount left over for the occasional treat.
  • Moderate savings – enough financial leeway to account for larger expenses while being able to afford short holidays and the odd luxury good.
  • Comfortable savings – enough financial backing that you can easily cover all expenses, go on regular holidays, and purchase reasonably priced luxury items.

On top of these three suggestions, the PLSA also accounts for whether or not a retiree lives in London, which will require a larger retirement pot to meet your daily living costs based on the capital’s greater prices.

With these factors in mind, most experts recommended that the average retiree in the UK will require between £20,000 and £40,000 per year in pension savings in order to live comfortably. So, if you were to retire at the current retirement age of 65, and reached the average life expectancy of 83, you would need a retirement pot of £360,000 to £720,000.

Naturally, we all hope to live far into our twilight years, and that means you’ll most likely have to save up more than the recommended amount. But while those potential figures might seem daunting and unfeasible right now, with the right saving mindset, you’ll likely have little trouble hitting a retirement goal of such size

What age should I start my retirement savings?

Ideally, you should start saving for your retirement as soon as possible, whether through a pension scheme or your own savings account. Not only will you thank yourself in the future, but the more time you give yourself to save up funds, the greater your personal savings will be when you finally leave the world of work.

Even if you can only afford to make a small contribution to your funds in your early working life, this will still go a long way towards boosting your overall pot, and there’s no reason you can’t steadily increase your contributions down the line.

How to start saving for retirement

When it comes to saving up enough for your retirement, there are a variety of paths you can take to maximise your savings potential, most of which you can begin looking at today.

First and foremost, you’ll need to be sure that you have a pension sorted out. If you’re employed, you’ve likely already been enrolled on the company’s scheme, meaning you’ll already have a tidy sum set aside for your retirement.

However, in tandem with your workplace pensions, you could also set up a personal pension. These pensions require you to make your own contributions, after which the government will contribute a further 25% on top of what you put in. And if you’re self-employed, this type of pension is essential.

There’s a lot more to be said about pension options in general, and you can find more detail in our pension hub  piece on the different types of pensions

Besides pensions, other forms of retirement savings could include setting money aside in a Lifetime ISA (LISA), savings account, or other banking investment option. These accounts are insured for up to £85,000 per person for each financial institution, so you may want to consider working with multiple banks for large savings protection.

Finally, investments are always a welcome option for those looking to save for retirement. Done right, they can provide a sizable return on your initial funds, and in the case of property, leave you with either a steady rent income or a lump sum payout when sold.

Of course, while these are all options you can be thinking about now, there’s no reason you have to retire come the state pension age. Many people choose to keep working on a temporary basis for both the income it provides the many and social opportunities, ensuring they continue to earn even once their pension starts paying out.

How do I know if I’m saving enough for retirement?

Much like knowing exactly how much you’ll need for your retirement, it can be tricky to know if you’re putting away enough money each month to reach your primary financial goal.

It can be good to have a number in mind of what you want to save each month and year, but these should not dictate how you save – especially if it means leaving you without any disposable income.

Instead, it may be wiser to follow one of the two suggested methods below when analysing your retirement saving plan.

The percentage method

This method of financial planning relies on you knowing exactly how much you’re earning each month from all your income sources once you’ve been taxed. Once you have this to hand, you then deposit a percentage of this total into your pension each year that matches half your current age.

The multiple earnings method

Alternatively, the multiple earnings method relies on you actively ensuring you have a specific equivalent of your annual earnings set aside at specific ages, e.g.;

  • 1 x your annual salary at thirty
  • 3 x your annual salary at forty
  • 5 x your annual salary at fifty

To do this, it’s recommended that you take your annual salary, divide it by the gap in years between your chosen ages, and then calculate how much you would have to save each year or month in order to meet this goal.

Both the percentage method and multiple earnings method are simple and reliable options for budgeting retirement finances and have since become the rule of thumb provided by many financial advisors. Remember that, while the amounts might seem small now, your base income is likely to rise in the future, boosting your savings.

What should I invest in for retirement?

Looking for where to invest for retirement can be a full-time job for those inexperienced in investing. So, unless you’re knowledgeable and comfortable with investing on your own, it’s advised you seek out the advice of a financial advisor.

With that being said, for pension investment into portfolios, you may want to research various self-invested pension plans (SIPPs) or stocks and shares ISAs provided by financial institutions. These can provide an excellent return on investment if handled correctly, though be away that these come with an increased level of financial risk.

Besides portfolio investments, you may choose to invest in property. As we’ve already mentioned, property can provide a passive income stream from renting as well as leaving you with an expensive asset that you can liquidate down the line should you need the funds.

And as a final note on retirement investment options, be aware that a lot of this money may be locked away until you reach a certain year or age threshold, and withdrawing any of your savings before this will likely incur financial penalties.

When it comes to pension savings, your main focus should always be on sticking to your retirement goals and adapting them to your current financial situation, and you should not tailor them to someone else’s needs.

If you’d like more information on pensions and what they entail, why not visit our pension hub? From the annual pension allowance to what happens to your pensions after you pass away , we’ve got every detail covered.

And don’t forget that the team at Blacktower provides more than pension services, get in touch with us today to see how we could help.

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This communication is for informational purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained  in this communication is correct, we are not responsible for any errors or omissions.

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