As people near retirement, their biggest worry centres on money, or rather lack of it. Surveys indicate that many people over the age of 55 have low levels of financial wealth and very little in assets other than their homes.
When compared with men, women are much less likely to invest their savings and so they miss out on significant wealth, especially in retirement. This fact is especially important when you consider that, on average, women live longer but earn less than men.
Although closing the pay gap may be beyond the control of most workers, closing the pension gap is far easier than you might initially assume.
How much will retirement cost?
The first step would be to learn more about how much your retirement may cost. There are various educational programmes available through employers, the government, and the websites of regulated financial advisors that aim to introduce the public to different retirement planning products.
One suggestion is that you’ll need between half and two-thirds of the salary you earned before retirement to maintain your lifestyle. A safe range would be between £24,000 and £28,000 a year.
How will you pay for retirement?
Let us assume that you’ll need £24,000 in retirement. Let us also leave your potential State Pension or any other private pension income aside for now.
One way to calculate how much in savings you’d need is to multiply £25,000 by 25. The result is £625,000. This calculation is known as the multiply-by-25 rule or the 4% rule.
In other words, if you’d like to finance your retirement with your savings, multiply the amount you’d need per year by 25.
On top of this amount, you may be entitled to the State Pension too. At present, the full basic State Pension is £125.95 per week. You’ll only get a proportion of the State Pension if you have between 10 and 35 qualifying years.
You may also have other streams of income, such as from rental property or a private pension. The important takeaway is to be realistic about how much money you will need in retirement.
How can you save £625,000 by age 65?
The last step is to appreciate how important it is to start saving, ideally early on.
My Motley Fool colleagues have written at length about funds and stocks to consider for a diversified retirement portfolio and have pointed out that the stock market returns about 7% to 9% annually on average. You can also find financial calculators online to see how much your savings would grow over time.
Let us assume that you’re now 40 years old with only £1,000 in savings and that you plan to retire at age 65.
You decide to invest that £1,000 in a fund now and make an additional £8,000 of contributions annually at the end of the given year. You have 25 years to invest. The annual return is 8%, compounded once a year. At the end of 25 years, the total amount saved becomes £638,483.
Saving £8,000 a year would mean being able to put aside almost £667 a month or £22 a day. Although the amount may look daunting at first, you’d be surprised at how much you could save if you paid attention to your monthly outgoings.
Knowledge is power
The facts are clear: most people are not well prepared financially for their golden years. However, women as well as men can use investment knowledge to change this.
