From an early age, you know that there will come a time in your life called “retirement” and that with it comes this apparently friendly thing called a pension. Throughout your education and career, you learned that it is something for which you need to prepare and save up – but have you ever really considered what it means or just how important it could be?
Most people tend to miss the right time to start preparing for retirement – and as a result cannot enjoy the same quality of life they once did. How could this be so, you might rightly ask, if you’ve been contributing towards your pension since your very first wage?
How much do you need?
The maximum State Pension is a lot less than people think – for 2019-20, it is £8,767.20 a year. A comfortable, worry-less retirement requires a good deal more – and the only way to achieve this is to start saving – and saving smartly.
To get this up and running, you must answer three questions:
- How much are you going to spend per month when you are retired?
- How long do you see yourself living for? (No matter how crazy that sounds!)
- When do you think you will retire?
These numbers will give you an idea of the money you will need for the duration of your retirement and from this base you will be able to adjust your savings accordingly. Keep in mind that if you want to make saving as light a burden as possible, you need to start early.
If, say, you plan to stop working when you are 60, want to spend £1,000 per month and a reasonable life expectancy is considered to be 80, then for your retirement period you will need:
Monthly income * 12 months * (Life Expectancy – Retirement Age) = 1000 * 12 * (80 – 60) = 240,000
Of course, you are then free to account for the contributions towards your state pension, and only plan to save up the sum that is left. There are several ways to do that:
The easiest way to start saving up is to open a deposit account at the bank – the kind that has a penalty for early withdrawals and thereby forces you to leave the money alone. Then you will just have to add your savings to that account every month and open a new deposit when your first one expires. You just need to keep in mind that:
- You shouldn’t keep more than £85,000 in a single bank – since up to that sum of money in any one deposit is protected, and will be returned to you even if the bank goes bankrupt because of the FSCS (Financial Service’s Compensation Scheme)
- Keep track of bank offers with better interest rates, as even a small increase could make you a lot of money if you have a large enough deposit
- Don’t forget to check the banks’ reputation, which might be tricky if you have several accounts – but again, it is a very important consideration
The disadvantages of this method are low yield and great temptation – when your deposit ends, you end up with a significant sum of money to hand and the desire to spend it might overcome any rational plans for saving. Low yield, while looking like a reasonable price to pay for low risk, might in fact be a trap. It only makes sense to keep money in deposit accounts with interest rates that are higher than inflation – as otherwise your money just burns away in the bank.
One way to avoid inflation is to keep your savings in several currencies – e.g., a mixture of pounds, dollars, and euros. However, even then your savings will not actually increase – they would simply not be affected by inflation.
Another way is to choose a non-state pension fund programme (and it doesn’t have to be one). You contribute to the fund throughout your working life, it will grow, and after you retire, it will simply pay out your hard-earned pension. The only thing you need to get right is choosing the correct pension programme from a trustworthy` pension provider. This is something at which financial advisers are expert.
Again, this method is straightforward. Those funds have been designed specifically for pensions, so they have pre-planned everything.
Whether or not you earn a lot, whether you have 20 or 2 years until retirement – pension funds are likely to have programmes that will suit your needs.
All this said, pension funds tend to be fairly low-yielding – sometimes even lower-yielding than deposits, because their yield is tied to their investment performance. It is therefore crucial to check the past performance of the fund, as well as its reputation. If the fund fails to produce sufficient returns, you’ll get back less than you put in.
It is, however, a fairly reliable scheme – because even if the fund goes bankrupt, in the majority of cases your funds in the scheme are insured and will still be paid out to you.
A different method, if you already have the funds to do so, is to buy property – and rent it out. This method will work if you buy in a metropolitan area or a fast-developing region – then the value of your property will increase continuously, and so will the rent that you get. The greatest advantage of this approach is reliability – your property will not disappear because of inflation or devaluation.
If you ended up choosing the place well, it will always be in demand, and will always remain an extra source of income.
The downsides, however, are that you need to maintain the property, find new renters, deal with any arising problems (e.g., a new boiler) – but hey, that’s life and this is more money for you to live on. It doesn’t require much more sacrifice than a part-time job and can even be delegated to an estate agent.
Finally, the most difficult and risky way to plan for your retirement is by investing. It also, undoubtedly, has the highest potential upside. Some shares can produce triple-digit returns – but how do you give yourself the best chance of picking those ones? The easiest solution is to consult a financial adviser who will put together an investment portfolio specifically targeted to your needs. That way you will not need to worry about finding the most relevant economic data, understanding market trends and detailed company information, or about learning all of the complicated jargon that comes with it.
Any investment involves risk of course – and it is up to you (or your financial adviser) to diversify your portfolio and make sure you do not end up wasting your pension savings.
There is only one solution to the retirement problem – and it is called long-term planning. You should start doing it as soon as you can and teach your children to do the same. Only you can guarantee yourself a serene and happy retirement.