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How to save £1million for your retirement

How much do you need to save for retirement?

The answer to this question is probably, more than you think.

Many financial experts would start with £1 million, which is likely to provide you with a taxable income of around £40,000pa.  So, if you want more than this, you need to increase the amount you save.

A good guide is to multiple your monthly required income by 300.  So, if you want £5000pm at retirement, you’ll need approximately £1.5 million (£5000pm x 300).  Remember you may also qualify for the state pension and have other defined benefit pension which may reduce this amount.

However, many people fall short of this target, to give you a guide to how much you’ll need to save and invest each month in order to reach that milestone by age 65, depending on when you start, I have calculated some options below.

I always suggest you put away for your retirement, at least the first hour of a working day, this equates to around 12.5% of your gross salary and works well, if you have always done that, but when you are playing catch up, you need to save much more.

Keep in mind that although these calculations can help you get a sense of what you should be saving to build a substantial retirement fund, they don’t take into account the many ups and downs people experience over their lives, such as pay increases, periods of unemployment or sudden financial windfalls or losses.

How to save £1million for your retirement

Here’s how much you need to put away to save £1 million by age 65.  You’ll notice the total contributions increase, as the time reduces.  With less time you’ll need to put up more of the money, because Einstein has less time to work.  Einstein Money is the term given to the compound growth you receive on your money.  It’s not money you have paid, nor your employer, it’s money the market has paid you, for investing your capital.

Starting at birth

  • If you start at birth, age 0, you’ll have 65 years of investing.
  • With a 6% rate of return: £46 per month (increasing by 3.5%pa) plus HMRC will pay £12pm
  • You’ll contribute £132,989 in payments, HMRC will pay you £33,247 in tax relief to help you and you’ll earn £833,763 of Einstein Money

Starting at age 10

  • If you start at age 10, you’ll have 55 years of investing.
  • With a 6% rate of return: £90 per month (increasing by 3.5%pa) plus HMRC will pay you £22pm
  • You’ll contribute £173,080 in payments, HMRC will pay you £43,270 in tax relief to help you and you’ll earn £783,648 of Einstein Money

Starting at age 20

  • If you start at age 20, you’ll have 45 years of investing.
  • With a 6% rate of return: £178 per month (increasing by 3.5%pa) plus HMRC will pay you £44pm
  • You would need an annual salary of £21,312 to save 12.5% of your income
  • You’ll contribute £226,173 in payments, HMRC will pay you £56,543 in tax relief to help you and you’ll earn £717,283 of Einstein Money

Starting at age 30

  • If you start at age 30, you’ll have 35 years of investing.
  • With a 6% rate of return: £370 per month (increasing by 3.5%pa) plus HMRC will pay you £93pm
  • You would need an annual salary of £44,448 to save 12.5% of your income.
  • You’ll contribute £296,813 in payments, HMRC will pay you £74,203 in tax relief to help you and you’ll earn £628,983 of Einstein Money

Starting at age 40

  • If you start at age 40, you’ll have 25 years of investing.
  • With a 6% rate of return: £837 per month (increasing by 3.5%pa) plus HMRC will pay you £209pm
  • You would need an annual salary of £100,416 to save 12.5% of your income.
  • You’ll contribute £391,309 in payments, HMRC will pay you £97,287 in tax relief to help you and you’ll earn £510,863 of Einstein Money

Starting at age 50

  • If you start at age 50, you’ll have 15 years of investing.
  • With a 6% rate of return: £2238 per month (increasing by 3.5%pa) plus HMRC will pay you £560pm
  • You would need an annual salary of £268,608 to save 12.5% of your income.
  • You’ll contribute £518,393 in payments, HMRC will pay you £129,597 in tax relief to help you and you’ll earn £352,007 of Einstein Money

Retirement Savings Account

Your retirement savings should be put to work in your pension accounts, such as your workplace pension, or personal pension plan.  These are tax deferred retirement accounts, which means when you contribute money, your tax is effectively refunded and therefore both your contribution, and at least the basic rate of income tax, is available to grow.  This income tax refund is the HMRC payment shown above.

When you draw on your money from the pension, from age 55 (this increase to age 57 from 2028), you will pay income tax on 75% of the money at your tax rate at the time.

If you were to die before retirement, your money is not lost and is past you’re your nominated beneficiaries, normally your family.

Einstein Money

As the numbers show, investing your savings early can be powerful thanks to compound interest, or what like to refer to as Einstein Money, which is when any interest earned then accrues interest on itself.

I use the term Einstein Money, because Albert Einstein famously said;

‘Compound Interest is the 8th wonder of the world.
He who understands it, earns it; he who doesn’t, pays it.’

You can see from the figures, why he thought it was the eighth wonder of the world.

In summary

  • The simplest way to get started is to contribute to your employer-sponsored Workplace pension. Even if you can’t save much, you should still aim to put enough into your Workplace pension that you earn any matched contribution your company offers, which is essentially “free money”. And if your contribution is completely matched, it means you’ll get 100% return on your contribution, immediately, risk free!
  • However, just because your employer may only match your contributions to a certain level, please don’t stop there, you can see above how much you need to save for your retirement, especially if you‘re a late starter.
  • It’s worth noting that you can save 100% of your earned income (including P11d benefits, bonus and car allowance) into your pension, up to a limit of £40,000pa.
  • You can also, if you held a pension previously, fund the unused allowance from the previous three-years.
  • However, if you’re a high earner, earning over £110,000, the £40,000 limit may be reduced for the years you are a high earner, it’s call Tapered Annual Allowance and I’ll cover that another time.
  • If you’re planning to put away more than the £40,000 cumulative limit, I suggest you first use your stocks and shares ISA, and then a General Investment account which will allow you to use your £12,000 capital gains tax allowance.

There you have it, your funding needs for your retirement, start today and consider starting for your children too.

 
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