Retirement should be something to look forward to, but unfortunately, many British adults don’t take their retirement planning seriously enough and as a result, are woefully under-prepared for their golden years. Here’s a look at five key savings mistakes many Britons are making.
Starting too late
This is a common problem. Many people tend to ignore their retirement savings in their 20s, 30s and 40s and only start thinking about how they’ll fund their retirement years in their 50s. Unfortunately, this is often too late.
The earlier you start saving for retirement the better, simply due to the powerful effects of compounding (earning interest on your interest). Start saving £500 per month at 25 and earn 10% per year, and you’ll amass nearly £3 million by the time you’re 65. In contrast, start saving £500 per month at 50 and earn 10% per year, and it will only grow to £216,000 by age 65.
Not taking advantage of employer contributions
The UK workplace pension landscape has improved in recent years and it’s now compulsory for employers to automatically enrol their eligible workers into a pension scheme and pay in money. That’s a good thing.
Yet many Britons are not taking full advantage of their workplace pensions and capitalising on bonus top-ups from their employers. Extra contributions could make a big difference to your wealth over the long run, so it’s definitely worth finding out if your employer will contribute more if you top-up your regular payments.
Not using tax-efficient products
In the UK, the government has also set up a number of products that are designed to help people save for retirement in a tax-efficient way. For example, we have the self-invested personal pension (SIPP), which is a do-it-yourself pension that offers tax relief. We also have a number of different Individual Savings Accounts (ISAs) including the Cash ISA, the Stocks & Shares ISA and the Lifetime ISA, which are all completely tax-free. Yet many people are not taking advantage of these products, which could be a huge mistake.
Holding too much cash
Having some cash savings is always important. Yet when saving for retirement, cash is not an effective investment. When you account for the effects of inflation, you’re probably going backwards in the long run if your savings are all in cash. When saving for the long term, it’s important to ensure that your money is invested in assets that can grow your wealth at a healthy rate.
Not having a proper asset allocation
Which brings me to asset allocation. This is the process of spreading your money across a range of different assets such as shares, bonds and cash. The idea behind asset allocation is to generate maximum gains for your personal risk tolerance while at the same time, reduce the overall risk of your portfolio.
Asset allocation is an extremely important financial concept and studies have shown that over the long term, it can actually explain around 90% of investment returns. So, it’s worth spending some time thinking about the best mix of assets for your personal requirements and risk tolerance and putting a proper asset allocation in place.
Saving for retirement doesn’t need to be complicated or time-consuming. Yet at the same time, it’s important to think about your retirement nest egg every now and then to ensure you’re on track for a comfortable retirement.