Retirement looms sooner than you expect, and millions will suddenly worry they haven’t saved enough for it. If you want to retire in the next 10 years, here’s what you need to do.
1. Work out where you stand
With luck, you will already have built up some retirement savings. You need to make 35 years of National Insurance contributions over your working life to get the full basic state pension, currently worth £8,767.20 a year. Visit Gov.uk to see how much you’ll get, when you’ll get it, and how to increase on it if you can.
With luck, you’ll have workplace pensions on top. People who move jobs regularly can lose track of their pots, so make the effort to dig up your old paperwork and track those schemes. The Pension Tracing Service website can help.
Finally, pull together your personal pensions and ISA savings. This will give you a clear idea of how much you have saved today, and how much income it might generate tomorrow.
2. Work out how much you need to save
Now for a personal question. How much do you think you can live happily on after you retire? £20,000 a year? £30,000 a year? Whatever the answer, you will need total pension pot worth 25 times your annual living expenses to achieve it.
Something called the 4% rule says you can withdraw that amount of money from your pension savings each year, and never run out of money. So if you think you need £20,000 a year, the 4% rule says you need £500,000 in total. Subtract the State Pension from that and you need to provide £11,233 income from your own sources – for which you need £280,825.
Saving that much is a tall order if you only have 10 years. Hopefully you’ll have workplace and personal retirement savings too.
3. Get your act together and start saving now
Time is of the essence, so don’t waste it. Even at this late stage, you need some exposure to the stock market. With cash paying 1% or 2% at best, a savings account isn’t going to do it.
Shares are riskier than cash and markets could be in for a turbulent time, so spread the risk by setting up a regular monthly investment plan, ideally using a low-cost Stocks and Shares ISA platform. You can invest from as little as £25 a month, but should be aiming for a lot more than that.
If you invest, say, £300 a month for the next 10 years, and your money grows at an average 7% a year, after charges, you’ll end up with £53,221 in your pot. If you want to save £100,000 at this stage, you will need to double that contribution to around £600 a month, and so on.
The days of the cliff-edge retirement are over. Growing numbers now plan to shift into part-time work rather than stop altogether. Many will leave their pension invested, drawing income from it using drawdown. This allows you to take more risk by keeping some of your money in shares rather than shifting it all into low risk investments, as used to be standard practice.
Next, you need to build a balanced portfolio of stocks, funds and bonds. Or you could keep it simple by investing in a FTSE 100 tracker instead. You only have a decade, and time moves fast as you get older, so don’t waste it.
