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Saving enough for retirement is a huge financial hurdle that you need to be able to get over to be able to live out your Dream Retirement™. When I do radio phone ins or seminars, the question I’m asked time and time again is ‘How can you best save for retirement?’ However, there is so much more to saving than knowing just how much enough is. The place to start is to firstly ask yourself a number of key questions:
1. How Much Should I Save for Retirement?
The answer is it depends on how old you are. The simplest method of calculation, which is a useful tool for those people in their twenties and possibly their thirties, is to save ½ your age as a percentage of your earnings. So if you are 24, saving 12% of your earnings for your retirement is a good guide.
This is a good starting point, but the closer you get to retirement, the more scientific you need to be. This is where a Lifetime Cash-Flow Forecast can give you much greater clarify, as you can take account of your actual spending habits, growth rates of your investments and time in retirement.
2. What Investments Should I Pick for My Pension?
The further you are from retirement, the more risk you can afford to take. You are likely to have a rockier road to retirement the more risk you take, but in the long run, you are likely to end up with more. That said, if you take too much risk, you might end up with nothing, so it is a fine balance.
Select an investment strategy that gives you a good asset allocation, i.e. a good spread of investments, such as equities, bonds, property and commodities. The blend of these should be determined by the level of risk you are willing to take, but needs to be balanced in line with the ‘Modern Portfolio Theory’ to ensure you get the best returns possible for a level of risk you are comfortable with.
3. When Should I Start Saving for Retirement?
Ideally yesterday! Seriously though, if you look at a standard piece of paper (0.05mm thick) and folded it in half 50 times, it would reach about 100 million kilometres high, which is about two-thirds of the distance between the Sun and Earth. Amazing, isn’t it? That is compound growth at work. The sooner you start the further you will get.
How does this help your pension? The longer you can leave your money to grow, i.e. the sooner you can start, the more impact doing so will have on your savings, because you will benefit from growth on the growth. Let’s look at an example:
Mr. Jones is 40 years old and he decides he is going to save £100 per month until he retires at age 65. He invests in a fund that grows at 6% each year. Over that 25 years, he has invested £30,000, but with the growth on the growth on the growth, his fund would actually be worth £107,000. That’s growth of 360% over the 25 years—not bad.
What if Amy Jones, his daughter, also decides to start a pension at the same time? She is 20 years old, and can only afford £56 per month into the same 6% fund. Coincidentally, this means she also invests £30,000 between 20 and 65. So she has put in exactly the same amount of money as her Dad, but over 45 years instead of 25. Instead of the £107,000 that Mr. Jones’ pension reaches, Amy’s pension will be worth £153,000. That is 510% growth instead of 360%. To look at it another way, that’s 43% more than her Dad had for saving the same amount, because her money is invested over a longer period of time. The sooner you can start saving, the better it will be. Even if your monthly savings don’t seem like large amounts, over time the money will grow.
4. Is a Pension the Best Place to Save for Retirement?
Quite simply, yes. It is currently the most tax efficient place to save to generate an income for later in your life. Effectively you are deferring tax today to pay less later on, whilst benefiting from tax free growth in the meantime.
So if you aren’t already saving for your retirement, get started now- this is how you can best save for retirement. If you are saving, but it isn’t enough, take action now. If you don’t know where the money is invested, make it your week goal to find out. Take a huge stride towards your dream retirement.
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