Many people will have short term financial goals they want to achieve, such as buying a house, saving for a wedding or a dream holiday. Saving for these goals often takes priority over saving for your retirement, because retirement can feel so far away that we think we don’t need to worry about it yet.
At the moment, you may be budgeting each month to cover your bills (such as rent or food), your social activities (such as eating out, holidays or shopping) and then if you have cash left over, considering what you can afford to save towards your bigger goals.
Once you’ve retired, your budget will change. You might not have a mortgage any more, but you might also have less disposable cash for your social activities, so it’s really important to think about what kind of lifestyle you’ll be happy with so you can enjoy your retirement.
The only way to answer this question is to think about the type of lifestyle you would like once you’ve retired. There is no right or wrong answer.
The Retirement Living Standards, based on independent research by Loughborough University, have been developed to help us to picture what kind of lifestyle we could have in retirement.
The Standards are split into three lifestyles: minimum, moderate and comfortable. Roughly speaking, a single person will need about £10k a year to achieve the minimum living standard, £20k a year for moderate, and £30k a year for comfortable.
You can read the Standards here, but for example, the Standards predict that a single person living a minimum lifestyle could afford a one week holiday, plus a long weekend in the UK and spend £460 on clothing for themselves each year. In comparison, someone living in the comfortable lifestyle category could afford to spend up to £1,500 on clothing, and afford 3 weeks away in Europe.
It’s difficult to think about how you want to live in retirement now, but it’s good to get an understanding of the lifestyle you’re heading towards at your current savings rate. If you act now, you can drastically change your standard of living in retirement. Our blog, small sacrifices can make a big difference, covers how increasing your savings by as little as £20 can impact your retirement.
For most people, your retirement funds will come from three different sources; the state pension, your workplace pension and then your savings or investments.
The state pension will give you a maximum of £179.60 per week, but not everybody will get the full amount.
If you are employed, your employer is required to automatically enrol you on a workplace pension where a percentage of your pay is put into a pension scheme automatically every payday. In most cases, your employer also adds money into the pension scheme for you – free money! The PLSA predict that if you have had a workplace pension for many years, combined with the state pension, you should be able to achieve a minimum to moderate lifestyle.
If you want to live a comfortable lifestyle, all of the experts (including us) would advise the same thing: start saving early.
If you start contributing to your pension earlier in life, you’ll benefit from the many years of saving plus the compound interest earned over the years (compound interest is when your potential investment returns get re-invested into the market). If you only start contributing later on in life you’ll have to start contributing a much higher percentage of your salary over a shorter period to achieve a comfortable lifestyle in retirement. Here’s an example;
How do I make the most out of my pension pots?
That’s what we all want to do – make our pension go further. There are couple of ways you can do this.
When you pay into a workplace pension, your employer matches and sometimes exceeds that contribution. It’s worth asking your employer that if you paid more of your salary towards your pension, would they match that. So for example, if you currently contribute 5% and they contribute 5%, ask them if you increased your contribution to 6%, 7% or even higher, would they match that. You’ll be saving a lot more towards your retirement and benefiting from extra free cash.
If you've worked for various employers over the course of your career, you’ve probably have several different pension pots. Consolidating them all into one place could help you better manage monitor and manage your money, and it could also help to reduce the charges you pay.
Rather than paying various fees for different pots, your whole pension pot can be managed by one low cost provider, like us – a win-win! If you’re not sure whether you’d benefit from consolidating your pensions, we can also review your pots for free and tell you whether it’s in your best interest to transfer them to us.
We’re always harping on about advice, but it’s so important. We’re on a mission to make financial advice as easy as possible to access. If you’re unsure where to start with your pension but know what kind of lifestyle you’d like to achieve when you retire, then talk to one of our financial advisers who can discuss the various options and help you to achieve your goals.