WARNING: Your Income Is Set To Drop By Two-Thirds!

Wouldn’t it be better to take a 5% pay cut today, than a 66% pay cut later?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Imagine your response if your boss said he was slashing your pay by two-thirds.

You might cry, yell, panic and at the very least, look for a new job.

Yet astonishingly, most of us will see our income drop by that amount, but aren’t doing a thing about it.

Some of us have already left it too late. But for others, there is still time.

retirementIt’s Tough Being A Pensioner

New figures from insurer LV= show that the average person sees their income drop by two-thirds when they hit retirement.

That’s a vicious pay cut.

The average pension income is just £8,774, roughly one-third of the average salary for working people over 60, which is currently £25,480.

Financially, retiring is like falling off a cliff.

How Many Holidays Does £7,644 A Year Buy?

If your employer slashed your pay by two-thirds, you could take out your frustrations on them. 

In this case, you largely have yourself to blame.

The only way to spare yourself a brutal pay cut is to start saving well before you retire, either in a pension or tax-efficient ISA.

Without savings of your own, you will be forced to scrape by on the state pension.

The new single-tier state pension, to be introduced from 2016, will be worth the equivalent of £147 a week in today’s money. That adds up to £7,644 a year.

Fancy living on that?

Auntie Lou Won’t Be There For You

To avoid falling off a financial cliff at retirement, you need to take action now. The longer you wait to start saving, the bigger the challenge you face.

Don’t rely on a sudden windfall to see you through, such as a bumper Lottery payout, or an inheritance from Auntie Lou.

That Lottery win will never come, and that inheritance could be swallowed up in Auntie Lou’s long-term care fees.

No, Your Property Isn’t Your Pension

And please don’t kid yourself that your property is your pension.

Unless you’re relocating from a hotspot in London or the South East to a cheaper area in the Midlands or North, the sums rarely work.

Too much is eaten up by stamp duty, removals fees and estate agency costs.

What you need is a pot of savings, earmarked for the day when that swingeing pay cut arrives.

A great way to build this is to use your annual tax-free ISA allowance, which increases to £15,000 from 1 July.

If you have at least five to 10 years, you should get a better return by investing in stocks and shares.

A Pay Cut Can Be Rewarding

Many people say they can’t afford to save for retirement, given all their other spending commitments.

And it’s true, many can’t afford to save at all. 

Many more could invest, say, 5% of their income towards the future, but don’t bother. 

Yes, that might be a struggle. But wouldn’t it be better to take a 5% pay cut today, than a 66% pay cut later?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey doesn't own shares in any company mentioned in this article

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »