How much should you be saving in your pension?
Running out of money in retirement is a scary thought, as we age we feel more fragile and venerable, a secure income during our retirement years gives us peace of mind, but comes at a price. The security provided by the defined benefit pensions offered by many larger employers has gone and the responsibility to secure our retirement income has been left to us to sort out.
Since the start of Workplace Pensions in 2012-18 most employed individuals have been auto-enrolled into their employer’s pension. Employees will now be saving around 8% into their pensions. To put this into perspective, that is the first 40minutes of their eight-hour working day, although it may be more than before, it’s not enough and targeting the first working hour or 12.5% is what we should be aiming for.
How much do you need saved in your personal pension?
About 400 times your desired monthly income, that’s a big amount! If you want a £500pm pension, then as a guide, that’s about a £200,000 pension fund.
The earlier you start saving, the less you need to save each month and the higher chances you have to make the target. Regularly indexing or increasing your contributions makes a positive difference to the end result and is especially helpful if you can’t afford too much now, sacrificing some bonuses and overtime helps too.
You may be thinking you can’t afford it, there’s no money in the pot as it is. Try and look for spending creep in your budgets, the incidentals you spend which you could stop, or cut back on. Maybe taking coffee in from home rather than the local coffee shop? Or bring in a pack lunch and using the savings to add to your pension.
Remember it’s your money, you’re just setting it aside in a pension, so you can spend it at a later date.
Many workplace pensions will provide access to life-styling funds, which automatically give you a higher risk investment when you have more years to retirement and gradually reduce this risk as retirement approaches, this takes the thinking out of the process and makes it automatic for you.
But once you have done all this, there’s no magic answer and it may mean you need to defer retirement, or at least accessing your pensions from 65 to 70, or perhaps 75! It can make a massive difference to your income. Deferring 5 years could give an extra 20% boost to your pension, or 45% after 10 years and that’s without paying in any more, just leaving it invested.
But don’t despair, working through retirement has social and physical health benefits as well as financial!