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We all know it’s a good idea to save into a pension while we work so that we have enough money to enjoy retirement.
But how much do you need to save exactly? And how do you know if you’re on track?
Although there isn’t a one-size-fits all answer to that question, there are various theories about how much you need for a comfortable retirement.
Here are just three to give you a rough idea.
Save your age
One theory, from investment company Fidelity, is that you should hit certain savings milestones, based on your starting salary, as you go through your career.
Fidelity believes you should have saved at least:
- 1 x your starting salary by the time you hit age 30
- 3 x your starting salary by the time you hit 40
- 6 x your starting salary by the time you hit 50
- 8 x your starting salary by the time you hit 60
- 10 x your starting salary by the time you hit 67
Let’s assume you’re 25 and just about to start your first proper job, paying £32,000 a year. According to this theory you should aim to have saved £32,000 into a pension by the time you reach 30.
After that, Fidelity believes you should save multiples of your starting salary by certain milestones.
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So, for example, it says you should aim to have saved at least £96,000 by age 40 (3x starting salary), £192,000 by age 50 (6x starting salary), £256,000 by age 60 (8x starting salary), and £320,000 by age 67 (10x starting salary).
Of course, this is merely the minimum recommended. The more you are able to save, the more money you will have in retirement.
Two-thirds of your final salary
Another school of thought is that you will need roughly half to two-thirds of your final salary a year to live on in retirement.
So, if you retired on £30,000 a year, then you’ll need a pension able to pay you around £15,000-20,000 a year in retirement.
That’s fine, but when you are in your twenties or thirties, however, it will be very difficult to guess what your income may be by the time you’re in your late 50s or early 60s.
According to a recent Which? study, the average couple needs an income of £18,000 a year to cover the essentials, £26,000 a year for a comfortable retirement and £41,000 for a luxurious retirement.
Combined, most couples will receive £16,300 in state pension if they qualify for the full amount. So you need to save into a workplace or private pension — or both — to make up the difference.
According to Which?, to achieve an annual salary of £26,000 you would need to have saved a total of £154,700 if you were to draw an income from your pot in retirement or £265,420 if you plan on buying an annuity, which pays a guaranteed income for life.
To achieve an annual salary of £41,000, according to Which?, you would need a total pot of £442,020 to draw from your pot or £757,000 if you plan on buying an annuity.
Aim for £266k
Digital wealth manager Moneyfarm has a simpler theory. To get a retirement income of £19,000 a year, it says, you’ll need to hit retirement with £266,000 in savings.
To achieve that by age 66 (the current retirement age), you’ll need to save £300 a month for 31 years (starting at age 35) and earn at least 5% on your pension investments.
However, of course, the earlier you start, the less you would have to save each month to hit £266,000 by the time you hit age 66.
For example, a person who started saving when they were 23 would only need to save £150 a month to hit £266,000 by the time they retired, assuming they earned the same 5% a year on their pension investments.
Likewise, if you started when you were 45, then you’d need to save nearly £700 a month to achieve £266,000 by the time you hit 66.
However, these figures are just a guide. You may need a lot more to get by in retirement, in which case you’ll have to save more every month. There is also no guarantee that you will achieve 5% a year on your pension investments.
So what now?
The truth is many people have no idea the amount of money in their pensions and don’t think often about how much money they’ll need in retirement.
However, spending a little bit of time working that out can pay dividends in the long-term.
The best course of action is to start early in your career and to save as much as your finances allow.
If you hit your 40s and 50s and think you haven’t saved enough, don’t panic and bury your head in the sand. Get help. A good financial adviser will be able to help you create a road map that will get you back on track.
If you can’t afford financial advice, then try the Government’s Pension Wise service, which offers free and impartial guidance about pensions.
Be aware though, Pension Wise doesn’t offer full advice where someone will recommend a course of action to you. They simply give you pointers and point you in the direction of useful resources so you can make up your own mind.
Finance Dee is a British-Jamaican living in the SE of England. By day she's a research consultant and by night a finance YouTuber and FIRE blogger