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How to save for retirement when you’re starting late

We’ve now got auto-enrolment helping most of us save for a pension. But what if you’re in your 40s or older, and don’t have much of a pension pot built up yet?

What’s your why?

You’ve got to start with where you’re going. Step 1 of The Money Plan is: what’s your outcome? I know I keep coming back to The Money Plan, but that’s because it works!

You need to ask yourself:

  • When do I want to retire?
  • How much do I want to retire on?
  • What other things are important to me on my journey to retirement?

It’s so important to act intentionally, not by reaction or default.

Get organised

It’s so difficult to achieve things if you don’t know where you are and where you want to go. Even if you’re not naturally an organised person, you’ve got to step up and work out:

  1. What’s coming in?
  2. What’s going out?
  3. What do I owe?
  4. What do I own?

Download free resources to help you get financially organised

Once you know what’s going on with your money, you can see how to set your financial foundations to build your house of wealth, starting with an emergency reserve of cash and incorporating different financial protections.

Pay down debt or save for retirement?

The reason we pay down debt before investing in our future is because it builds security, and it helps your cash flow to give you more money in the long run.

Even if you have an interest-free arrangement(s), clearing your debt first gives you such a feeling of security, and psychological ‘wins’ to celebrate.

Once you’re debt-free and have your financial foundations in place, you can decide how to allocate the money you have leftover each month after paying your bills and paying your WAM to yourself.

Download my debt management spreadsheet to help you pay down your debt

Is 40/40/20 right for you?

In The Money Plan, I recommend allocating it 40/40/20: that means 40% goes to your retirement savings, 40% on overpaying your mortgage, and 20% back to yourself. That last part is important, because if you’ve been living financially lean in order to get financially secure, this is the time to reward yourself for your efforts.

Whether it’s training, holidays, that item you’ve always wanted… enjoy the rewards, with the only rule being not to take out debt!

If you’re catching up on pension savings, you need to ask yourself if that will give you enough for your retirement plan. Will that 40% be enough?

It comes down to your tactical approach. I’m of the opinion that if you have a mortgage and you’re a basic rate taxpayer, it’s better to clear your mortgage first. That will give you security and comfort.

If you’re a higher rate taxpayer, earning more than £50,000 a year, there’s a good argument to say that you should pension more of your income because it’s more tax-efficient.

If you’re in your mid-50s or older with no real pension pot, you may have to face up to the fact that you won’t retire at 65 and will have to defer. It’s just not practical to save up hundreds of thousands in the next 10 years in your pension.

In this situation, you may decide to split your surplus money 50/50 between your mortgage and pension, and postpone taking the 20% for yourself. It all depends on your circumstances.

While that may not be appealing, it’s important to remember that working gives us more than just money. If you don’t like the job you have, I understand you’ll be keen to get out. But working gives us mental stimulation and keeps us active, so you don’t need to be in such a rush to retire, particularly if you like your work or would like to retrain.

It’s very common in the US to keep working in your retirement years, mainly because of the cost of things like healthcare, but it’s not yet as common in the UK.

Where to save your pension payments

For virtually everyone, the best place to invest your 40% or 50% is your workplace pension, on top of your regular contributions.

What you’re looking for is a “fair” charging scheme: a 0% or 1% fee on your money going in, and running costs of no more than 1.5%. Some schemes charge 5% going in and the costs can run to 2.5%, but at those levels you’re losing money for your retirement.

If you don’t have a workplace pension, use an online platform such as to set one up. It’s a platform I set up to provide simple and inexpensive ways to invest. You’re charged 0% going in, and fees run at around 0.6% to 0.7%.

How aggressive should I be with my investments if I’m playing catch up?

The closer we get to stopping working, the more cautious we should generally be. And it’s always important to be aware of your tolerance for loss – remember that during a big pull back in the markets, your money will fall around 50% in value if it’s all in the markets, so consider how you will feel about that.

As a general rule of thumb, I use a formula of 100 minus your age to determine how much of your money should be in the stock market rather than low-risk investments: if you’re in your 20s, 100-20 is 80, so you should have around 80% of your money in the markets.

If you’re playing catch up, you might want to stretch that rule; if you’re in your 40s you may be tempted to put more than 60% of your pension into the markets. But remember, you have to be honest with yourself: the markets will fall at some point, by around 50%, so ask yourself how you would feel then. It’s an easier question to answer intellectually and theoretically than it is emotionally and in reality.

If you are going to be more aggressive, then make sure you’re in it for the long-term. You should only be investing in the stock markets if you don’t need the money for at least five years, and preferably seven or more.

So if you’re 45 now with little pension, you might say to yourself, ‘I have 20 years left to invest this money before I want to retire, so I’m going to be more aggressive than the rule of 60% allocation to the markets at my age, because I’m not going to use that money until I’m 65.’

If you’re naturally cautious, it’s not advisable because a drop will make you lose sleep at night. But if you have a long-term mentality, it’s a valid strategy if you’re playing catch up.

Click here to find out the level of investment risk you are comfortable with


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