This month, our personal finance columnist, Mitch Hopkinson, stresses the importance of saving for retirement as soon as possible.
Mitch, a recipient of the ‘Financial Times Independent Financial Adviser of the Year Award’, is Head of East Midlands at deVere United Kingdom, the UK division of deVere Group, one of the world’s largest independent financial advisory organisations.
The need to start saving for retirement sooner rather than later has never been so important.
In order to live a comparable, or enhanced lifestyle in your ‘golden’ years, the time to start adding to your pension pot is now.
Retirement is increasingly becoming more of a personal responsibility, so it’s vital that people start thinking about their pensions early on in their working lives.
I am asked by many clients, how much should they consider saving in to their pension? So let us consider this for someone who is in their mid-30s.
Let us assume that you have not started saving at all yet towards this important goal? If this sounds like you, then that is a shame, as the earlier you start, the easier it is to save up for retirement. Think of it like this, the sooner you start, the sooner your money will be invested and working for you.
If you leave it too late you could find that you have to save a lot more, or perhaps worse still put your retirement date back in order to increase the length of time you have to save…. So, start now –once you do it won’t be long before you don’t miss the money and the habit is then in-grained.
The Government has realised, due to the ageing population, that this is a way that they can better afford the state pension for pensioners of the future. They have had to put the pensionable age back so that it gives them more of a chance to afford the state pension. This now means that most people’s state pensions won’t start until after age 65. Somebody in their mid-30s will have a retirement age of 68, although you might want to plan for retiring later than this, particularly if you don’t start saving a serious amount of money soon.
The reason I say this is that people are living longer and thus, retirement can be at a later age, because when you get to 68, you will probably live to see your late 80’s or even longer. At the moment the basic state pension will give you £110.15 per week. Not much is it?
And if that is all you are relying on; well, you should plan on working in some capacity to supplement your income to help make up the difference in what you need to live on. From 2016, the state pension will become a flat rate of around £144 per week – but, as with most changes, there will be some winners and some losers – you should check how this will affect you.
Let us assume our 35-year-old wants to build a pension of £11,500pa (by age 68), savings of about £300per month are required from now until retirement at 68. This should help to give a more ‘liveable’ income to run alongside the state pension.
When discussing this topic I’m also asked whether or not there are any short cuts to saving for retirement. The answer? There aren’t I’m afraid, but there are other things (highlighted below) that you can do to help make your target more achievable.
Firstly, you should ensure that you are not wasting any of your money on high interest loans. At the moment interest rates are very low. This means that you should cut out anything that is costly from an interest point of view, reducing your debts is another way of saving, so ensure you do this as soon as possible.
Secondly, you should also consider how you save. If you can afford £300 per month, consider that about two thirds should be put in to a pension and then the rest in to an ISA. Most people who have not, up until now, had the ability to join their employer’s pensions scheme will soon get that chance, as workplace pensions are becoming mandatory for most employers. As a result, it will most often be the case that your employer will pay in to your pension on your behalf, this is invaluable and something that you should definitely check out.
In addition, saving in to a pension is great, because the taxman helps too. For every £10 you invest he will put in a further £2.50. This makes saving in to pensions really effective as it is not only your money that is growing, but also that added by the taxman. Pensions also tie your money up until you retire, this means that you cannot spend it on something else. However, some of your savings ought to be accessible, which is why I have suggested that you run an ISA alongside your pension fund. This will provide another tax-efficient pot that can be used for other events - but bear in mind that if you do use it instead of your retirement fund, you will need to save more, or retire later.
Thirdly, as your money will be invested for a long time, you need to take a keen interest in where it is invested. One of the things that will help you to achieve your retirement goals is getting good growth from your investments. Someone in their 30s can afford to take more risk than someone in their 60s. This is because the 30-something has more time for their investment to grow. You should look to invest in funds that have high growth potential. In order to achieve this, more of your money should be invested in the stock market. In particular you should consider those areas that could deliver high growth for you, sectors such as emerging markets, technology or other international funds in areas that have the potential to grow at faster rates than Europe, the U.S. is one of the largest markets in the world so exposure here is a good idea too.
Lastly, most people in the UK like investing in property and thus find themselves thinking along the lines of ‘my property is my pension’. Sure, property can perform well and particularly so, when you are able to borrow money which has the effect of magnifying the growth – but be wary, since this magnification effect can also magnify losses, which is why, when property goes down in value, some people find themselves in ‘negative’ equity, meaning their loan is worth more than the value of their house. If you want to invest in property, do this alongside saving for your pension too. That way you have got the benefit of spreading your money in two different areas.
So to summarise: start saving ASAP, pay off your costly debts, and join your employer’s pension as soon as you can. Having done that, ensure that you invest your money wisely.
Your retirement is too important to put off until tomorrow, so take action today.