How to save for your retirement no matter the age you start

If you start working in your 20’s, retirement will feel like a lifetime away, and it’s unlikely that it will be the main thing on your list of things to save for. With student debt, the property ladder to get onto and possibly starting a family there are plenty of things you’ll likely want to be saving for. But when is the right time to start focusing on building your retirement funds? Understanding the best ways to save for retirement does not need to feel like something to continuously put at the bottom of your priority list, and if you’ve left it till later in life when is it too late to pull it back. Whether you are in your 20’s, 30’s or you are over 50, we want you to understand the best ways to save for the retirement you desire.

Considering what you want your retirement to look like

Everyone's version of 'retirement' is different, some may have a clear date in mind to stop working while others may come to a point in life where they can choose to work less, should they wish to start phasing into retirement. Our desired retirement age will differ too, which is why one of the first important things to consider is when you think you might wish to retire. Having a target age to reach 'financial independence' will help you start to work backwards when calculating what you need to do and save today. Without this chosen age, you run the risk of always 'waiting until tomorrow'.

It’s also important to bear in mind the type of lifestyle you wish to have post-retirement and how much of your pension pot will be needed to support this. You may not know today exactly what this amount might need to be but take time to better understand what this could be using today's costs. This will put you on the right path, then you can update this target as you go.

Using a monthly savings plan

One of the most powerful habits to get into is saving a chosen amount of your monthly income whenever you get paid. If you think of your monthly income in three categories, it keeps things simple to understand where your money is going and how your retirement funds are benefitting:

• Pay your future-self first – choose amount to build your retirement pot monthly. If you set up a direct debit to take a regular amount as soon as you are paid, it will quickly feel like any other bill you need to pay and absorb each month – but one that you will benefit from in the future. Plus, if it is going into a pension plan, you’ll receive tax relief on the deposit – so a little extra will be added.
• Have a dedicated ‘mandatory’ fund – think of this as your money to pay your food, bills, mortgage etc.
• Leave yourself a ‘fun fund’ – these funds are what you are left with to spend on meals out, trips away, seeing friends or whatever you like spending your time and money doing.

Do not forget to make sure you are enjoying your life whilst thinking about life in the future. It is all about balance.

Reinvest returns: the benefits of compounding 

Reinvesting returns, especially when used with a regular savings plan, can give you great results with minimal effort over the long term. 

Example: If you save £500 as a household each month and achieve an annual return of 4% net of all costs, then over five years you will have saved £30,000 and made £3,260 in returns to give you a total of £33,260. The return equals 11%, rather than 4%, due to the impact of compounding. An amount that could equal a deposit for a home, paying off a mortgage, ticking off bucket list items or could simply be left invested to continue growing.

(Note: This is a very basic illustrative example that ignores 'real world' factors, such as costs, market volatility and much more).

Understand how to use various assets and accounts 

Below are five main assets to consider when looking to save for retirement and the different accounts you can consider opening, or investing in, to help your plans. 

• Property

The use of property and a mortgage (debt), gives you the ability to leverage money. Historically in the UK, this is how many households have made a sizable portion of their wealth over their lifetimes. Primarily through their main residence, but for some, with the use of rental property, which provides an alternate income stream in retirement.

The concept of leverage is where you use borrowed money to invest with hopes of making a return. As an example, if you have a £25,000 deposit and borrow £75,000 mortgage loan to purchase a home of £100,000, if that home goes up by 5%, in effect, you have made a 20% return on the equity (£5,000).  You could then leverage this further as you could then use the return to go towards another property or investment, and so on.

• Savings

Cash. Plain and simple. Having cash saved is always a safe and encouraged strategy to absorb shocks that may occur in your life and affect your income. Having this in place can also provide the foundation for investing elsewhere. That being said, with inflation spiralling to levels not seen in decades it’s important to also understand that even cash carries some risks, even if the amount you have saved doesn’t fluctuate  your money could be eroded  in ‘real terms’ if the cost of living increases by more than the interest you earn.. Try our Inflation Calculator to see how this may affect your savings over time.

• Investments 

The question then sits with investments vs pensions. Both are investment vehicles that can offer lower tax options for your finances, especially when utilising allowances (Capital Gains), ISAs and pensions. Offering growth and income when monies are placed into them.

Investments provide access to ‘tax-free’ money flexibly, and it is worth understanding in more detail how you can get the most from your money. Visit here to read up about investments to learn what might work best for you.

• Pensions

Pensions can come across as more confusing than investments due to their restrictions and tax rules. But do not let the initial fear of understanding pensions sway you from learning about how they are one of the best and most tax efficient ways for building your retirement fund. You can visit here to read about pensions and if you find yourself wanting to know more you can arrange a free consultation with one of our advisers.

• Is your business your pension?

For those that set up and run a business, this can form part of your retirement plan as you look to exit the business later in your career. For a select few, this forms the main way to build your retirement fund over other options. That said, the other assets are all equally important, especially for non-business owners.

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How much do I need to save for retirement?

Unfortunately for us all, there is no one answer to this, because everyone’s retirement will look different and therefore require different funds. However, there is a general rule of thumb that when you reach retirement, if you have 7x your annual income saved in your retirement fund, you will have a good amount to support your needs for the rest of your life. You may also find our "What is a good pension pot?" article helpful.

This can be broken down further for every decade you save to make tracking your progress easier;

By the time you turn 30 if you have 1x your annual income saved in your retirement fund you are off to a good start. By 40 years old you should aim to have 2x your annual income saved, then at 50 years old it is advised to have 4x your annual income saved. Once you turn 60 ideally you should  have 6x your annual income saved. 

The amount you are advised to save between 40-60 years old may seem daunting, but bear in mind that at this age it is expected you will be earning your highest salary, so monthly savings, return on investments and pension contributions will also be at their highest during this period. 

If you have managed to save the required amounts throughout your life, hopefully by the time you reach your preferred retirement age, you will have the desired 7x your annual income saved in your retirement fund.

Advice for saving through different ages

What to do in your 20s and 30s

When you are young and relatively new to the working world, there are likely to be many pressing saving topics on your mind.  Retirement planning is probably something that does not even scratch the surface yet, because when you are 20, retirement is so far away, right? But, starting your retirement planning from a younger age has huge benefits meaning in the long run you won’t need to save as much as someone starting much later in life. This is where the true benefits of compounding come to play.

When you start working, you should benefit from your employer paying into a pension which, through matched pension contributions can, in some cases, double your overall contributions. That and the tax relief you receive on contributions can make a big overall difference to the amount of money that can be saved and built up for your retirement fund. Pension payments are usually automated which is bonus as they will complement the monthly retirement savings you put away.

Focusing on maximising your Lifetime ISAs to get an uplift of 25% from the Government is something to consider when you are beginning to think of your retirement funds. This effective 'return' is also very compelling for those wanting to get onto the property ladder and therefore it may be wise to take advantage of. 

When you start working you will benefit from being able to pay into a pension, although you can start earlier if you are able to afford to. Your employee is required by law to make contributions to your pension pot, assuming you meet the earnings threshold, make sure to maximise your contributions as that’s free money you are missing out on if you do not!  Lastly, during this time many people may start a family and do not return to work for some time. This means you may suddenly run out of time to save before choosing to step away from full-time work. As a household, you might find yourself then only having one income for some time, with additional new costs. Therefore, planning ahead and beginning to save early is really important in allowing for any changes in income that are likely to come in the future. This is especially important for women with regard to retirement planning as traditionally they are the ones who give up their income to support the family and therefore put less into their retirement savings fund.

What to do in your 40s and 50s

You have turned 40 and suddenly the idea of  retirement feels more realistic than ever as a chosen retirement date doesn’t feel so far in the distance as it once did. It is likely you have at least another 20 years of full-time work ahead of you of course, give or take, and you want to make sure you are doing the right thing for the day your retirement come. For many, home moves and raising a family take the focus in this period of life. But savings for your retirement cannot be ignored so hopefully pensions are already being funded along with other investment accounts and your plan has started to gain real momentum. 

You may also see yourself moving into one of the strongest earning periods of your career, which will provide potential scope for further saving and investing. Hopefully, you are fully used to putting away some of your earnings automatically as they come in and may now have the ability to save more than ever. When your salary goes up, make sure your monthly saving plan increases at same trajectory. 

Over the years, the value of your accounts will hopefully be growing and as they do, having the right investment strategy to complement your monthly saving plan is particularly important as you will want to know your money is doing the best it can, achieving the best returns, against the levels of risk you are happy to take.

Your savings will need to be strong enough to withstand any disruptions life may throw at you and you should consider using income protection and life insurance, if beneficial.

Your investment strategies should start to diverge, as you ringfence accounts for different purposes, e.g. medium vs. long term goals. 

As you get to this stage of your life you can assess how your retirement funds stack up against the advised 4x your annual income amount.

If you’ve reached your 40s and are just getting started on your retirement planning journey, not all is lost. The same exercise needs to be done first, think about what age you want to retire and work backwards to work out how much you’ll need to save each month to have enough to retire at this desired age. Even with your tax relief, employer contributions and the benefits of compounding investments, you’ll need to save a lot more than you would if you had started in your 20s, but you may still be able to make up for some of the lost ground.

What to do in the last few years before 'Retirement'

As you move closer toward your retirement age you may be starting to investigate how to access your pensions and other considerations, such as lifetime allowance planning and making use of pension 'carry forward' to maximise pension contributions. 

You may want to tighten your budget and ensure you are doing everything you can to have your funds in place to take retirement at your planned age. At this stage have a clear path mapped out for  by having your own personal ‘cash flow’ model, along with guidance in understanding how on track you are. If you are not on track, professional guidance can add real value at this stage. 

A sustainable retirement

You have made it, retirement is here. You have worked hard to reach this point, and now you want to feel secure in your retirement funds and the plans you have for the next phase of your life. This is where having a properly laid out retirement plan in place is most beneficial for any concerns. You can discuss worries about the longevity of your funds, understanding ‘safe’ fund withdrawals, how much financial risk to take at this point and other concerns you may have. One of the main concerns is ‘will I run out of money?’, which can mean unnecessarily spending less money than you need to on things you want to do and enjoy.

How we can help

To get your retirement plan started, discuss the state of your current retirement funds, or anything else to do with retirement financial planning, why not speak to one of our specialists today with a free consultation.

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Note: This article is for general information only, does not constitute individual advice and should not be used to inform financial decisions. A pension is a form of investment. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns. Your home may be repossessed if you do not keep up repayments on your mortgage.