So, you’ve hit 50 or flown past it. Welcome to the club! If you haven’t saved anything for retirement, as millions haven’t, my guess is that you want a few ideas about what to do about it.
First off, all is not lost. You are going to get the New State Pension when you reach the government’s State Pension Age which, for you and me, is 67. It’s not a fortune, standing today at around £8,546 per year, but it’s something to build on.
Step 1 — A plan to save
I think you need to make a firm commitment to save as much money as you can every month between now and when you do retire. And I’m not talking about saving what you feel you can afford each month on a piecemeal basis, I’m talking about setting a figure and saving it month in and month out without fail. You need to prioritise your monthly saving and treat it like any other bill that MUST be paid.
My Foolish colleague Roland Head did a bit of research recently, which suggested that if you start at the age of 50, you need to save £3,183 per month to accumulate £1 million by the time you retire. To get to that monthly figure, he assumed an annual average rate of return of 7% from investing on the stock market with the money.
Saving more than £3,000 per month is a big ask. If that figure is too much of a stretch, you can ask yourself whether you need a cool £1 million to enjoy your retirement. For most people, I reckon a quarter of that amount would be a big financial boost in retirement on top of the New State Pension.
So, the clear message in the figures is that you need to save as much as you can, regularly and consistently, and starting as soon as possible.
Step 2 — Financial judo
But where should you put it? There are ways you can apply financial judo to your retirement savings to make them work really hard, and my top idea is to join your employer’s Workplace Pension Scheme if you have access to one. Two strong benefits will flow from that. Your employer will typically help you save by adding between 3% and 10% of your annual salary ON TOP of what you pay into your pension yourself, and all the monthly contributions from you AND your employer will be free of tax. So that often means at least another 20% will be added to your pension fund that would otherwise have gone on tax.
If you can’t get in a Workplace Pension Scheme, you can still reap the tax-free benefits by saving into a Personal Pension or a Self-Invested Personal Pension (SIPP). Pensions give you tax relief when the money goes in, but it’s taxed as income when you draw it out in retirement. You can reverse the tax-relief advantage by opening an Individual Savings Account (ISA), which allows all your gains to be tax-free, but there’s no tax relief on the money you pay in.
Step 3 — Invest
It almost goes without saying that I think you’d be best off with a stocks and shares version of the ISA account. Watch out for my next article and I’ll discuss the investments you could make within a SIPP or ISA account when you are 50 or over.