Nick Huber
November 2016.

How can I make sure that I save enough for a comfortable retirement?

1 answer

It’s hard to apply a rule of thumb to something as personal as retirement planning. The amount you need to save is dependent on how much you want to have in retirement, when you decide to retire and what retirement looks like. 

In the past, under the traditional retirement, when people reached the age of 60 or 65 they retired and stopped working entirely. Retirement has changed so much in the last ten or 20 years with a gradual transition from work to retirement. Many people have phased in retirement with part-time work or voluntary work and sources of income, such as an ISA [Individual Savings Account]. That turns all the traditional rules of thumb about retirement on their head. It reduces the pressure on pension withdrawals. Pensions really come into force when you’re too old to work, or there’s no work available. 

"Work out what age you want to retire and the income you’d like in retirement. Then work backwards." 

It doesn’t mean you don’t need as much in your pension, sadly. We all need a lot in our pensions as we’re living for longer and the returns on investments and assets. Bonds and gilts, which tend to relate to rates for annuities [using your pension pot to buy an insurance policy that gives you a guaranteed income for the rest of your life] and income rates for pensions are very low and probably will be very low for a long time. Work out what age you want to retire and the income you’d like in retirement. Then work backwards. 

A good way to work out how much you need in a pension pot is to take four per cent as a withdrawal rate. If you wanted £10,000 a year you can divide that by four per cent and you’d need a pension pot of £250,000 (which would last 25 years). That gives you something to work towards. Typically, the annual income people want in retirement varies between half and 100 percent of what they were earning before they retired. A benchmark for a pension payment to have a decent retirement income is probably around 15 percent of your monthly salary by the time you get to your early thirties. 

What you should pay into your pension each month comes down to affordability. For people in their twenties or even thirties, anything is better than nothing. They may be trying to clear student debt or save up for a property. Retirement seems so hard to visualise and such as long way in the future.

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