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

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?

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