How to Save for Retirement
Your retirement may seem a while off, but it's never too early to start saving for your retirement. Read on for some top tips for how to go about it.
Imagine what you will do when you are no longer constrained by the 9-to-5 grind — the things you’ll do, the places you'll go, the people you’ll see.
But to make the most of the newfound freedom you'll gain when you retire, you will need two things: good health, and money. And wealth, just like health, is easier to achieve if you get into good habits early.
How to build your retirement savings
The reason why starting earlier is better is because of the power of compound interest. Essentially, this is when your money earns interest, and then, if you leave it invested, that interest earns interest, and so on. Given time, your savings pot can increase — especially if you keep adding money each month.
The easiest way to save for retirement is automatically through your workplace, if you’re employed. Most workers now are automatically enrolled into their company pension scheme (unless you opt out), and your employer contributes too.
However, just paying in the minimum amount may not give you a comfortable income in retirement, so it’s worth striving to pay in as much as you can. Find out if your employer matches your contributions — this would be like getting a pay rise, even if it means you need to pay in more yourself.
Think about your expenditure in general, too. Perhaps you could cut one or two non-essentials to fund regular savings in your pension.
Insurer Royal London calculated that a 28-year-old earning £26,000 a year could build a pension pot worth £419,337 over 40 years, if they paid in 8% of their salary (assuming they got a 3% pay rise a year, and earned 5% in investment returns). But by skipping three takeaway coffees a week and putting the £10 they save into their pension, they could boost their total pot to £550,380. Just paying in a little extra, early on, can make a big difference over time.
Why investment returns matter for retirement
While the act of saving is important, you also need your money to be in investments that make you a good return.
Most savers in workplace pensions are invested in so-called default funds, which are based on your age now and when you’re likely to retire. But investigate all your options to find the best investments for your situation.
Your annual pension statement will tell you where you are invested and how your money is performing, and you can contact your pension provider if you want to make any changes. If you can’t find your most recent statement, don’t let that put you off: call your provider for the information you need.
How do I save for retirement if I’m self-employed?
Self-employed people won’t get access to a workplace pension or the benefit of an employer making contributions on their behalf. But they can still save for retirement in a personal pension, such as a self-invested personal pension (SIPP), and enjoy the benefit of tax relief on contributions.
If you’re self-employed and have a limited company, it may be tax-efficient to pay into your pension through your limited company because it’s a taxable expense and can reduce your corporation tax bill.
Can I save for my retirement with a Lifetime ISA?
If you are under 40 you could consider the Lifetime ISA as an extra string to your bow. You can pay in up to £4,000 a year until the age of 50 to get a government bonus of 25% on everything you contribute.
How much do I need to save for retirement?
As much as you can! How much you actually need will depend on what daily expenses and bills you expect to have, whether you will be mortgage-free and how much you’d like to spend on hobbies and fun.
A common rule of thumb is to aim to have around two-thirds of your pre-retirement salary. Plug some figures into a pensions calculator to see how much you’re on track to get. Once you’ve got the facts, you can start putting a plan in place to achieve your goals and get the retirement you want.
Image source: Getty Images
Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more