Future events have a habit of feeling very distant, until they arrive and it is easy to put saving for your retirement to the back of your mind, especially if you have more immediate financial concerns. However, there is no doubt that the earlier you start saving, the better.
The stark reality of it is that most people are not saving enough for their retirement. Auto-enrolment was introduced to encourage people to start saving more for their retirement, but the minimum employee contribution of 5% is not sufficient for the majority of people, contrary to what half of employees think.
A report carried out by Aviva last year concluded that nearly a quarter of employees (23%) think retirement will be a financial struggle. So, what is the magic number that you should save for retirement?
Ideal pension pot amount
The generally accepted figure among experts, if the aim is to maintain a similar lifestyle in retirement, is a contribution equal to 13% of your annual income*. This includes the employer pension contribution.
Investment house, Fidelity, has devised a system it calls the ‘Power of Seven’, consisting of a number of savings goals. Ultimately, it suggests that to comfortably retire at 68, you should have saved the equivalent of 7 times your annual household income.
This rule works quite well for many people. For example:
- A couple with a household income of £40,000 a year would, according to the rule, need a pension pot of £280,000.
- If they’ve been saving 13% of that £40,000 income, this means that they’d have been living on a gross income of £34,800 a year.
- But provided they’ve repaid their mortgage (assumed to be £750 per month) by retirement, they’d actually need an income of just £25,800 a year to maintain their lifestyle in retirement.
- Assuming two state pensions of £8,000 a year each, their £280,000 pension pot would need to provide them with £9,800 a year**.
The ‘Power of Seven’ doesn’t really work for those households with higher incomes where the State Pension would provide a lower proportion of your retirement income. It also doesn’t work well for those still renting in retirement.
What steps should I put into action?
There are steps you can take to bolster your pension pot. If you receive a pay increase, perhaps allocate half of it to your savings or investments and enjoy the other half now. As tempting as it can be to spend, think about tomorrow and give yourself more options in your golden years.
The single most important thing you can do is start saving early. If retirement is decades away this may seem unimportant, however, the earlier you start, the more time you have for your investments to grow — and recover from the market’s inevitable downturns.
*Whilst 13% may be sufficient for those starting work if you haven’t started at this level you are likely to need to make even higher contributions.
**Naturally, the exact figures will differ from case to case and, whilst they are helpful, it is important not to rely on ‘rules’ or examples in this article. It is recommended that you see an independent financial adviser to fully understand your personal situation and have regular reviews with that adviser to keep yourself informed and on track.