The common sense guide to saving sufficiently for retirement

Most of us want to reach a stage in life where we would like to work less, or not work at all. However, many of us do not save enough to retire on an income which would be sufficient to have a comfortable lifestyle. A common question is "How much should I be saving?", and the answer is always dependent on your own circumstances and the standard of life you are looking for in retirement. This guide is designed to help you look at all the factors you need to work out how much you should be saving in retirement.

I'll be all right in retirement, won't I?

If you are like most of us, the answer to that is no! According to GE Money only 59% of British adults have a company or personal pension in place, With only 17% of 18 - 24 year olds having made any form of retirement provision. The assumption is that you only need to worry about saving for retirement when you are older, when the reality is that the younger you start saving for retirement, the better it is. For example, if you start saving £200 per month at 20 and retire at 65, your income at retirement should be around £1330 per month. If you delay saving the same amount until you are 40, your income in retirement would be £511 per month. Therefore it makes more sense to start saving for your retirement as early as possible.

Where do I start?

This question is answered with the phrase 'begin with the end in mind'. Firstly look at the level of income you need, in today's money, to ensure you have a comfortable lifestyle in retirement. Bear in mind that inflation will erode this amount and you need to take this into account. There are a number of inflation calculators on the internet which will help you with this task and this will give you the amount you will need when you retire in real terms. The next step is to look at your existing provisions. Existing provisions could include income from inactive or current pensions, income provided from property, income provided from savings and investments and state retirement benefits. Once you have worked out what you will receive when you retire, the next step is to look at your shortfall. This is calculated in the following way:-

Amount you need to maintain lifestyle

Minus

Current Provisions

Equals

Shortfall

Once this shortfall has been calculated, you then know the amount (ideally per year) you need to provide to have the lifestyle you want. You then need to calculate how much you need to save into a pension vehicle to get this annual income. One way of working this out is to seek advice from a professionally qualified independent financial adviser. However, there are a number of web based tools you can use to calculate the amount you will require together with the amount you will need to contribute to meet this need. Bear in mind that there are limits to how much you can invest in pension arrangements, and you need to be carful not to exceed these amounts (there are limits to what you can save both annually and in total). These limits do not affect most people, but please check to confirm you do not exceed these limits.

How much should I save in retirement?

Again, it very much depends on your personal circumstances. However, generally speaking, the amount depends on your age and the level of income you are looking for in retirement. Below is a table showing the amount you need to save ( based on your age ) to achieve certain levels of income into a pension arrangement. Again the best way to work out how much you need to save is to speak to an expert. However, there are many web based tools which allow you to calculate how much you should be saving now to build up to your require in retirement. These tools include :-

SAGA Retirement Calculator - powered by Fidelity Prudential Retirement Calculator

FT.com retirement calculator

What does the state provide?

We all know the state provides the 'state pension' however an important thing to bear in mind is that the level of state pension is dependent on your level of national insurance contributions. It is worth checking with the Pension Service your entitlement to your state pension by using their State Pension Forecast service. Please bear in mind that the state pension may change in the future, and the value of your state pension may be eroded by the impact of inflation. One other important point to consider when looking at state pensions is the age you intend to retire. This may be younger than the state pension age, and therefore when working out what you need in retirement bear in mind that your state pension may start at a later age than you intend to retire.

State pensions currently start at 65 for men and 60 for women who were born before the 6th April 1950, however the state pension age for women gradually increases if your date of birth is after April 1950, and is the same as men (65) if your date of birth is after the 5th April 1955. It's also important to bear in mind that the government intend to increase state retirement age up to 68, with certain speculation that it will increase beyond this.

How can I save for retirement?

Saving for retirement can be done in a number of ways. The main way individuals save for retirement is via a pension scheme. This continues to be an attractive method of saving for your old age due to the tax relief you receive on contributions, and the fact that it is invested tax efficiently. Pensions can then be used at retirement to provide a lump sum (normally up to 25% of the fund), and purchase an income with the remaining amount. There are other methods individuals use to provide an income in retirement such as releasing funds from their property and relying on built up savings, and all these options have benefits and drawbacks. It is important that you get good quality advice before making a commitment on using any of these options.