When Chancellor George Osbourne announced his pension reforms in this year’s Budget, part of the reasoning was to offer assistance to “responsible” savers, he explained. After saving for the best part of their working lives, these people no longer have to worry about getting a raw deal in the annuity market.
Allowing people to withdraw as much of their pension pot as they want, instead of being required to buy an annuity, should encourage more long-term saving. Many, however, don’t know how much they need to put away to see a reasonable retirement income from the age of 65.
Take care of yourself
There’s a gap between the sort of retirement people expect and what they’ll actually get. Financial planning is essential to our wellbeing, but all too few of us understand what it means.
Mention ‘saving, investing, interest and debt’ to the average person — is that a conversation anyone would like having? How about ‘security, stability, comfort or taking care of your family?’ People will willingly avoid anything to do with the former, while at the same time desperately seek the latter. They’re the same thing.
If you want a stream of retirement income for as long as you live, it starts with educating yourself.
It’s not too late
A worker in their 50s can expect to live until 80 and beyond. Rest assured, that’s more than enough time to ensure a happy retirement; but you have to act with purpose. To avoid a retirement nightmare, don’t put off saving any longer.
Because our time horizon is a few decades, what we’re actually talking is investing rather than saving. Investing is about planning an entire future. Saving is for holidays.
Retirement specialist Prudential suggests people retiring this year will need £120,000 and a full state pension to get them through to their 80s. How much, then, will you need to invest?
The retirement you want
Let’s say you’re 50 years’ old, have no debt and earn £40,000 a year. Our expected return on investment is 5% (roughly what UK shares have delivered over time). You’ll need to invest 15% of your income, or £500 a month, to retire at 65 and receive the average expected annual income.
Thanks to the power of compounding, your £500 per month could be worth £130,000 in 15 years. That’s not to say that there won’t be any hurdles, but you’ll be on the right track
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We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.