Even if you love your job, at some point you’ll have had enough. What you need is a big enough savings pot to allow you to retire at that point. Here’s how to do it.
1. Find out what you’re worth
The first step in any journey is to work out where you are starting from. Only then can you work out the direction of travel, and how fast you must go to get there in time.
Begin by requesting a State Pension statement from Gov.uk/check-state-pension or by calling the Future Pension Centre on 0800 731 0175. This will tell you how much pension might get, when you could get it and if there is any way you can increase it.
Don’t hold your breath though, the State Pension is typically worth £8,546 a year.
Do the same for every company pension from all the employers in your career, and track down any missing plans through the Pension Tracing Service at Gov.uk/find-lost-pension or by calling 0845 6002 537. Then round up all your other long-term investments, such as ISAs and unit trusts. Put them all together and what have you got? A good idea of the task ahead.
2. Work out what you need
Next, you need to work out how much you need to save. That way you know what success looks like.
The figures can look daunting because of today’s low interest rates, although hopefully things will pick up by the time you retire. As a guide, if you have £100,000 of pension at age 65, that will currently buy you a level annuity income of £5,381 a year, according to Hargreaves Lansdown (less if you want it to rise with inflation).
Added to the basic State Pension this would give you total income of £13,927 a year. That’s hardly riches. If you had £200,000 you would get £19,308, while £300,000 would give you a more respectable £24,689. The more you save after that, the merrier your retirement will be.
3. Save now to plug the gap
As a rule of thumb, you need to save 15% of your income to afford a decent retirement without suffering too great an income drop. So a 21-year-old saving that amount could hope to retire at around 65. If they upped that to 20%, they could bring that down to around 58, and 25% would reduce it to around 54. Few can afford to save that much, though.
Or try this from Chase de Vere. At age 20, saving £250 a month would amass a pension pot of £500,000 by age 65, assuming 6% annual growth after charges. This rises to £450 if you start at age age 30, then £825 starting at 40 and £1,775 at 50.
Your early contributions are the most valuable because they have longer to grow in value, so don’t delay. Join your company pension if you have one, and claim employer contributions and tax relief. Make use of other tax-efficient schemes, such as a stocks and shares ISA and Lifetime ISA, and take a risk on the stock market as in the longer run it should deliver a far greater return than cash.
The alternative is to carry on working and working, and you probably don’t want to do that.