If you want to save enough money for a comfortable retirement, leaving pension planning to chance is likely to end as a disaster.
Financial professionals plan pension saving with the help of sophisticated software, but savers can set their own targets and measure if their savings are on track with some simple formulas.
Anyone who can manage straightforward arithmetic can become their own IFA by working with these rules – and that extra money saved on fees for money advice can go into savings as well.
Here are the four tips:
- The 70% solution – The assumption here is someone in retirement can live well off 70% of the income they took home while working.
The total includes the state pension and any income from workplace pensions and investments.
Work out 70% of your final salary, take away the income from the state pension and investments and multiply by 20 – the amount of years someone should expect to spend in retirement.
The amount remaining is the figure to fund from extra saving.
- The 40-year race – Why 40? This is the rule of thumb for when someone should start saving before their retirement.
Starting later is OK, but the later saving begins, the more someone should put away each month to reach their target
- The rule of eighths – This is how much of an average salary that should be saved as a pension. This amount includes any employer contributions but not any top up from the tax man.
Revise the amount upwards every time a pay rise is awarded
- Times by 10 – The frightening amount a retirement saver should have in a pension by the time they give up work.
The amount is 10 times average salary, so if you earn an average £40,000 a year, the fund should come to £400,000
It’s never too late to start saving for retirement, but the longer the delay, the more money is needed to hit the target to fund a comfortable retirement.
Don’t stuff money into a pension and hope for the best. Keep on top of where the funds are invested and do not be afraid to move them around to improve the investment return.