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The shocking truth about retirement saving

How much should you be saving in order to ensure a comfortable retirement?

One popular rule of thumb has it that you should halve the age that you are when you start saving for retirement and save at least that percentage of your pre-tax salary every year until you retire.

So, if you start saving aged 20, save 10% of your pre-tax salary every year. If you start saving aged 40, save 20% of your pre-tax salary every year.

Key variables

Of course, the eventual size of your retirement pot will vary depending on

  • how much you earn, and
  • how big the return is that you earn on your saved money.

The average pre-tax salary in the UK for men and women combined is running at around £29,000 per year considering those in both full-time and part-time work.

But it’s clear that few earn an average salary and there are wide fluctuations around the average for many roles. For example, senior managers, directors, officials and some in the professions earn on average around £58,000 a year and in some cases much more. Those employed in the care and leisure industries are among the lowest paid averaging around £19,000 each year. Part-time workers can earn as little as £12,000 or even less.

Here’s what you need to save each year for various salaries and different starting ages:

Salary/Age

20

30

40

50

£12,000

£1,200

£1,800

£2,400

£3,000

£19,000

£1,900

£2,850

£3,800

£4,750

£29,000

£2,900

£4,350

£5,800

£7,250

£59,000

£5,900

£8,850

£11,800

£14,750

Ways to boost your pension savings

You can help turbocharge your pension savings by taking advantage of tax-free investing vehicles such as pensions. If you pay your savings into a workplace pension, a personal pension or self-invested personal pension (SIPP) the government will pay back your income tax on that money into the pension, which gives your savings an immediate boost.

Employers usually pay extra money into your workplace pension for you, on top of what you pay in, again giving your savings a real boost. So a workplace pension is a smart way to save for retirement if you can get into one.

An alternative to pensions is to invest into an Individual Savings Account (ISA), which doesn’t give you tax relief on the way in but it does allow all your gains to grow free of tax, and there’s no tax to pay when you eventually take the money out either.

The power of investing in shares

But it’s no use letting your money sit in cash accounts because the interest rates are too low to compound your money well. It’s best to make your money work really hard for you within the pension or ISA wrapper and one of the best ways to do that is to make sure it is invested in shares or share-backed investments such as managed funds or index tracking funds.

On average, the stock market has been returning around 8% per year in dividend and capital gains and if you achieve that kind of return, the process of compounding should help you build up a comfortable retirement nest egg. But the shocking truth is you need to start as early as you can and save as much as you can. There’s no way around that.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.