In this article, Investor Weekly explains how you can work out how much you should have saved in your pension at any given age.
Almost everyone’s pension savings, or pension pot as it’s often known, ebbs and flows through their working life.
Different jobs have different pension providers, people take periods ‘out’ to look after children or family, or recover from illness.
Periods of self employment or re training are also common reasons for a period without pension saving.
As a result, there is no one number that you should have at any given age.
A majority of people look to save or pay significantly into a pension through their 50s, to reach a pension target, because as much as anything it’s often only at this age that they start to know what they are likely to need when they retire.
Here are the steps a financial advisor will take to work out what you need in pension or other savings and investments each year between now and retirement:
- Take your target retirement age, to see how many years of saving and investing you have available
- Estimate your income needs at retirement
- Take into account whether your mortgage is paid off
- Understand that, even if you enjoy fine health, your lifestyle will probably ‘slow down’ at 70, and again at 80
- Assume that your income need represents 5% of your personal pension and investments combined. Calculate, how much you need on this basis. I.e. If you need £15,000 more than the expected state pension, you would need £300,000 in pension and investments.
- Apply expected inflation at 3% per annum.
- Assume investment returns after costs of 7-10% (assuming you have a professionally designed and maintained investment portfolio that reflects your risk profile)
- Use a compound interest calculator to establish how much you need to save per month with these variables
- If you cannot save enough, you need to look at your income and costs. If your current saving is more than sufficient, you can look at retire sooner.
