Why Save For Retirement?
Why Save For Retirement? The Sooner You Start, The Safer You’ll Be
Why do I need to think of retirement? If you are concentrating
on building your career and bringing up your family, it may be
that retirement is the last thing on your mind.
However, if you don’t start thinking about it soon, it may
already be too late! There are at least five good reasons why
it’s never too early to think about retirement provision.
- The basic state pension has been topped up recently. However it can never amount to enough to pay for more than the absolute basics. If you are counting on state retirement provision to provide you with any sort of quality of life, you are going to be very disappointed.
- Many people hope that the equity in their property can be a substitute for saving. However, the recent fluctuations in the property market should act as a warning that this is not a certainty.
- The average life expectancy has increased sharply. Retirement can easily last 20-30 years. So you need a lot more money to provide for your retirement than would have been required a generation or two ago.
- Not only has the length of retirement increased, but the proportion of older people to younger working people has also increased, and is continuing to increase. You cannot count on there being enough working people to support your generation in retirement.
- More and more employers are cutting back on final salary pension schemes. The onus is increasingly on individuals to make their own provision for their retirement.
So if you accept the need to save for your retirement, what
decisions do you need to make?
- At what age do you want to retire? Many people like the idea
of retiring early. But remember that the earlier you want to
retire, the higher the level of saving you will need to be
making and the earlier you need to start.
- What kind of income do you want in retirement? Supposing you
decide you want an income that is equivalent to about 60 per
cent of average salary, which is currently about £24,000. This
means an income of about £14,400. Then assume you live for the
average length of time after retirement, which is about 18
years. (There is every reason to suppose you will live longer
than this, if you’re a normally healthy person.) This would
require a total of about £260,000. Assuming an annual annuity
rate of 7 per cent, you would need to build up a pension pot of
well over £200,000 to achieve this type of income. And this
takes no account of inflation, either before or after your
retirement!
- What kind of lifestyle do you want in retirement? You will note that the above calculation is based on a pretty modest income, even by today’s standards, let alone taking account of future inflation. Do you want to do a lot of travelling in your retirement? Do you dream of a second home in the sun? Do you want to be able to relax and enjoy life with your friends, family and grandchildren? Or are you content to live a modest lifestyle and perhaps do a small job to eke out your pension? There’s nothing wrong with that. But it needs to be your choice rather than being forced upon you.
Once you have decided on the kind of life you want, and the
level of income you will need, you then have to work out the
total pension pot you will require to provide this level of
income. You then have to decide how you are going to achieve
this, and perhaps talk to a financial adviser
about pension advice. Whatever age you
are, it’s not too early to think about it! The earlier you
start, the better your chance of enjoying your ideal retirement.
EB May 2008