- 19th May 2015
Don’t end up relying on a rainbow for your retirement
Knowing how much you need to save for retirement is tough. A lot can change over a period of, say, 30 years or more. And not just to your own personal circumstances but to the economic climate too. There’s no doubt that starting to save for your retirement earlier is a good thing, but when it’s so far away it’s easy to prioritise other things ahead.
Time and money
Keeping your retirement pot ticking over is key. Even relatively smaller amounts will build up and make a big difference if you give your pot the time to grow. One of the biggest factors for long term investing is compounding growth. For example, at an average annual growth rate of 6%, £10,000 invested over 35 years would be worth more than £20,000 held over 23 years.
Regardless of any other impacting economic events and circumstances, the major force that any long term savings pot battles with is inflation. This is the general rise in the price of goods and services; and conversely the rate at which money devalues. Currently, the rate of inflation has just turned negative– for the first time we have had deflation since 1960, in fact – but the Bank of England has a target of 2% and so over the longer term inflation will almost certainly increase.
Simply put, if you want your savings to increase in real value, they need to increase by more than the rate of inflation.
What do I need?
On an individual level, you need to decide when you want to retire and how much you will need when you do. That said, the answer to the latter question may well dictate that of the first.
A survey by Which? found the average amount someone felt they needed in order to have a comfortable retirement was £18,325 per year. With more spare time it’s likely that spending on holidays and leisure will go up, while costs such as a mortgage may not be applicable anymore. As such, it’s generally the case that you’ll need less money to live on in retirement compared to earlier in life.
So, once you’ve considered how much you need to live on in retirement, the next question is how much do you need to save? Well, to begin with it depends on your age and what you already have saved. If you factor in a state pension of around £7,700 (exact figures for the flat rate system are not yet confirmed), you’ll need to generate over £10,000 more – a pot of approximately £300,000* would be around the benchmark for such a figure.
Staying on track
From a general point of view, the factors to consider when trying to save for retirement are clear; invest early in order to give your savings time to grow, and account for the effects of inflation. On an individual level you need to try and gauge how much you’ll personally need for the standard of living you want. There are a number of different ways you can save – an ISA or a pension, for example – but it’s important to keep track of your funds and ensure they’re heading in the right direction. Make sure your retirement pot is safely in hand and not just at the end of a rainbow.
*source: FT.com, annuity rate for single life, RPI linked, 5 year guarantee at 65 years of age.
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