How much should I be saving per month? What percentage of my income should I save for retirement? How much should I have accumulated by the age of 40/50/55? How big a pension pot do I need? These questions are both valid and frequently asked, but another thing they have in common is a lack of simple answers.
You might have come across various retirement saving calculators which are supposed to come up with an exact amount or percentage. It would be nice to know you need to save £847 a month and if you do that there will be nothing else to worry about.
Unfortunately the world does not work that way. It is full of uncertainties, especially when it comes to finance, investing and living costs. Furthermore, different people have different lifestyles and different expectations. A homeowner who prefers to live a simple life in the countryside will probably need much lower retirement income compared to someone who rents in London and wants to spend retirement travelling or pursuing expensive hobbies. Last but not least, unexpected health issues can also turn both life and finances upside down.
These factors are hard to quantify and can’t be entered into a simple calculator.
Make Your Expectations Realistic
While far from a complete solution, the figures and simple rules you find in books and websites can be used as a rough starting point. For example, experts recommend saving at least 15% or 20% of your income, or having saved at least 11 or 12 times your final salary in order to avoid running out of money in retirement. The exact percentages or multiples are subject to the particular expert’s opinion and are not really that important. The main purpose of these ballpark rules is to provide rough guidance and help people get realistic expectations.
For instance, you can’t expect to be able to maintain your living standard if you are saving only 1-2% of your salary, as the numbers simply won’t add up. Saving over 10% would (at least) get you much closer to your goals.
Turning Simple Rules into a Tailored Strategy
There are lots of factors and uncertainties which must be considered when planning for retirement. You can start with a general rule like “save 15% of income” and then think about your personal circumstances and how they would most likely affect the numbers for you.
For example, you are already in your 40’s and haven’t saved much yet. Therefore you probably need to adjust the recommended percentage upwards, to say 25% or 30%, in order to catch up. Would you like to travel a lot in the first years of retirement? That would probably require another upwards adjustment. And so on. Your adviser can help you correctly assess your circumstances and their implications.
Be Prepared to Make Changes
Importantly, an effective retirement planning strategy rarely involves a fixed amount or percentage to save throughout the rest of your working life. Many of the various factors are far from constant in time.
For instance, when your children get to college, you will probably be spending more on their education for a few years, leaving less to retirement savings. It is not a problem, as long as you plan for it and save a bit more in the other years. Similarly, developments in the financial markets or changes in pension legislation may bring up new challenges as well as opportunities.
The objective is to be heading in the right direction, but ready to adjust your strategy to changes in the regulations, the economy or your life. This is what financial planning is about.