How Much Should You Be Saving for Retirement?

How much money have you saved for your retirement? It’s hard to think about it while we’re still working, but it’s a question that must be asked. Most of us are saving in a pension or investment scheme, yet aren’t sure what the right amount is. On top of this, the average life expectancy is rising, making it difficult for us to know how much income we’ll need should our retired life be longer than expected.

This confusion is leading to widespread confusion and problems. According to figures released by the Government in a study of its flagship workplace pension scheme, 4 in 10 of us are underestimating how much we need to set aside. Half of under-savers are earning at least £34,500 a year. This means that around 6 million middle-class workers are going to experience a drop in their standard of living when they retire due to a dramatically decreased income. This week, we’re walking you through how much you’ll need to save to make sure you’re comfortable in your retirement.

Working out how much you’ll need

It’s always worth starting your planning with the basics. Trying to roughly calculate how much your retirement outgoings are will give you the best guide for your ideal income.

A great place to start is with your mortgage. As one of the most consistent costs we all face, you’ll be able to judge this amount easily. If you’re close to paying off your mortgage or have even paid it off, this will lower the amount you’ll need to save for retirement.

The Office for National Statistics says that the average annual food spend is £2,808, while gas and electricity works out at around £1,253. These numbers will also rise with inflation.

After this, you’ll need to take your lifestyle into account. If you’re the type of person who will want to spend their retirement on holidays, taking up new hobbies or enjoying meals out, you’ll increase the amount you’ll need to save. Careful saving now can lead to more comfort and adventures in retirement!

On top of this, you’ll need to take practical concerns into account. If your partner is relying on your pension, you’ll need to save more. Should you decide to downsize house, you could find yourself having more free money. As some events are unpredictable, you’ll want to leave yourself with some flexibility should dramatic changes occur.

Taking your money as an annual income

The amount of income you should be receiving each year is a debatable topic and is reliant on factors including how much you earn, where you live and how much of your mortgage is left to pay. As a general rule, most experts agree that it should be around two-thirds of your final salary. If you, for example, finished work on an annual salary of £30,000, you should be aiming for an annual retirement income of £20,000.

According to an analysis by the Department for Work and Pensions, if you are on £13,000 or less, you should be aiming to have around 80% of your salary in old age. This equates to around £10,400 per year. On the other end of the spectrum, if your final wage is more than £55,000, you’re recommended to save for an annual income of 50% your final salary. This works out at around £27,500.

Your situation depends entirely on personal factors, meaning it is best to get tailored advice. This can be done by contacting a professional financial advisor for guidance.

Is a lump sum better?

If an annual salary isn’t for you, there is also the option to take a lump sum. To do this, you’ll need to set aside a lump sum that is approximately 10 times your final salary. For example, if you end your career making £32,000, your lump sum should ideally be valued at £320,000. This amount, along with interest, is advised to see you through old age.

These savings can be done through a pensions scheme, in a personal savings account, such as an ISA, or achieved through investments.

Both a lump sum and an annual salary are good options for retirement. Whatever you choose to do should be suited to you. Its best that you choose the method you feel most comfortable with to give you peace of mind in retirement.

Saving money for your pension can be daunting, but is important. With careful planning, you’ll be able to achieve a comfortable and relaxing retirement.

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Top Tips for Making the Most of Your Pension Savings

We’re all looking forward to a stress-free retirement. After years of saving into a pension, it’s finally time to reap the rewards of your hard work. Yet many of us in retirement are still unsure how to make the most of our money to ensure long-term financial security while still enjoying our retirement.

With a state pension kicking in around our mid to late 60s, building a private pension is a worthwhile option for many. Looking into accumulating investment wealth is vital for ensuring that you can enjoy your money in your retirement. This week, we’re looking at the best plans for rewarding your long-term investments.

Using tax-friendly wrappers – autoenrollment schemes

You’ll now be required to automatically pay into a pension when you’re working. This is usually a fund made up of a mix of assets, including equities and bonds. With most of us now being a part of these schemes, we’re setting up a good basis for future savings. Both you and your employer now must pay into the scheme, meaning that you’ll see your investment grow at a faster rate than saving on your own. Acting as an encouragement for workers to build up retirement savings, these systems have additional benefits when it comes to your taxes.

Every contribution that you make into your pension pot is boosted by the Government and includes some tax relief. This means that your savings will rise with inflation and your pension is free from tax until you choose to withdraw from it. Tax is only payable on the pension fund once you take an income from it, however, the first quarter of this is tax-free. After this, whatever you withdraw from your pension is taxed at your usual income tax rate.

Using tax-friendly wrappers – Individual Savings Accounts (ISAs)

To save more money for your pension, you may also want to consider using an ISA in addition to your autoenrollment scheme. This allows you to pay into your account over several years and build up your funds through regular investing. Your ISA will be invested on your behalf through various sectors, such as bonds and shares.

Unlike your autoenrollment scheme, there is no tax relief on the contributions that you make to your ISA. However, it does allow for tax-free withdrawals, which can be made at any time. This means that you can take out money before you reach the standard age of a pension, which is 55, and the money you receive is not taxed as income. This is a worthwhile addition if you’re planning on retiring before you’re 55 or just want an extra boost in your savings. As life expectancy goes up, it’s a good idea to be prepared for a longer retirement period.

Lifetime ISAs (LISAs) is a recent addition that should also be considered when saving for your retirement. These allow you to out in a maximum of £4000 a year, which then gets a 25% bonus. This stop being paid as soon as you hit 50, but can be used to assemble a decent start to your pension. Working as a hybrid of a pension and an ISA, these can help you to save an additional £1000 per year with regular investments.

Start early

Although this may seem obvious, the earlier you start to save, the more money you’ll have. While it can be difficult to think about retirement at the beginning of your working life, you’ll give yourself more of a chance to save enough for a comfortable retirement.

With autoenrollment, younger workers will already be saving in a workplace pension. However, this doesn’t mean that you shouldn’t look into other options. Using an ISA or a similar tax-free investment, young savers can give their pension more of a chance to grow. This could even mean an earlier retirement, as you won’t be as reliant on your state pension.

Monitoring your money

Keeping an eye on your pensions will give you a better understanding of how you are doing. You’ll be better able to access if your schemes are working for you and take any corrective action that may be required. Whether you want to change investments or increase your monthly contributions, you’ll find yourself I a better position to do this if you monitor your money. Before you make any big decisions or move your money into different investments, its best to check with a professional financial adviser first.

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