Saving for retirement probably seems like something you need to think about only when you’re older. With your whole career ahead of you, retirement is a long way off, right?
Wrong!
The earlier you start planning and saving for your retirement, the better off you’ll be. Starting in your 20s rather than your 30s or 40s can make a huge difference, thanks to the power of compound interest over time. Even relatively small contributions can add up to a sizeable retirement pot if you start early and keep it up.
Building a secure financial foundation for when you retire takes some effort, but it’s totally worth it to retire happy. This blog will give you five practical tips to set you on the path to a comfortable retirement. Whether you’ve just entered the workforce or you’re looking for advice on ramping up your retirement savings, read on for simple steps you can take now to retire happy later.
Why it’s never too late to start saving for retirement
Starting to plan and save for retirement early in life offers many benefits. The earlier you start saving, the more your money can work for you. Money saved earlier has more time to grow through compounding interest. Starting early, even with small amounts, means you may need to save less per month to reach your retirement goals because your money has longer to grow.
Knowing you’re actively saving for retirement can provide peace of mind and financial security from an early age. Starting early gives you flexibility to start small and increase savings as your salary rises. More time and flexibility mean saving for retirement won’t feel like a burden. You can do it steadily rather than playing catch up later.
Longer time horizons allow for more investment growth potential. Starting early gives you more time to make up for any periods where you can’t save as much. And all the compounding interest and growth from starting early can lead to a higher income in retirement. The key is taking advantage of time and starting the retirement planning process as early as possible. Patience and consistency always pay off.
Tip 1: Start saving for retirement as early as possible
The earlier you start saving for retirement, the more you can benefit from compound interest working its magic over time. Even small, regular contributions in your 20s can really add up by the time you retire. Saving early means your money gets to grow for longer before you need it. Let’s look at an example:
Say you start contributing £200 per month to your pension at age 25. If your investments earned an average annual return of 8%, by age 65 your contributions will have grown to almost £270,000. But, if you wait until 35 to start saving £200 per month, you’d only have around £146,000 by 65. That’s almost £124,000 less, simply by starting your retirement savings ten years later.
The moral of the story? Time is one of the biggest factors in growing your retirement pot. Starting early, even with modest monthly amounts, gives your money more time to compound and grow through investment returns. By beginning to save in your 20s, you can take advantage of decades of growth and potentially reach your retirement goals earlier while setting aside less money each month.
Start small if you need to, but make sure you start early and keep it up consistently throughout your career. Retirement will be here before you know it.
Tip 2: Take full advantage of workplace pensions
Workplace pensions are a great retirement savings vehicle to take advantage of. With workplace pensions, contributions are taken directly from your wages, making automatic saving easy. Employers match a percentage of your contributions, which is basically free money toward your retirement.
Your contributions are made pre-tax, lowering your taxable income now. And any investment growth in the account is tax-deferred. You pay tax only on withdrawals in retirement. With these tax and matching incentives, make sure you’re contributing enough to get the full benefit.
Many workplace pensions allow you to increase your contribution rate periodically. Aim to increase your pension contribution whenever you get a pay rise. Adding even an extra one per cent when you can will make a difference over time. The more you can save in these tax-advantaged accounts, the better off you’ll be.
Using workplace pensions to their full potential is one of the easiest and most powerful ways you can save for retirement. Don’t leave any free matching money on the table. Take advantage of tax breaks and get in the habit of bumping up your pension contributions.
Tip 3: Make additional investments outside your pension
While workplace pensions should be your first priority, it’s also important to make additional investments outside of your pension to grow your retirement savings further. Some options to consider:
- ISAs – In the UK, Individual Savings Accounts (ISAs) allow you to save and invest up to £20,000 tax-free each year. ISAs provide flexibility to access money before retirement if needed.
- SIPPs – Self-Invested Personal Pensions (SIPPs) are a type of private pension that allow you to choose investments. They offer a wider range of investment options beyond typical pension funds.
- General investment accounts – Taxable investment accounts allow you to invest savings without the restrictions of tax-advantaged accounts. Though you pay taxes on gains, you do have easy access to the money.
- Property – Real estate investments like buy-to-let or commercial property can generate income during retirement.
The key is diversifying your approach beyond just pension savings. Don’t put all your retirement eggs in one basket. Utilise a mix of tax-advantaged retirement accounts and general investments to grow your wealth. A balanced approach reduces your risk and gives you more flexibility leading up to and during retirement.
Tip 4: Have a target retirement income in mind
To effectively plan and save for retirement, it helps to have a target annual income in mind for your retirement years. This gives you a goal to work towards.
As a rule, aim to replace around 60-80% of your pre-retirement income with your retirement income. This should allow you to comfortably maintain your standard of living in your golden years.
If you currently earn £50,000 per year, for example, target an annual retirement income between £30,000-£40,000 – or 60-80% of your current income.
Of course, your specific income needs will depend on factors like the lifestyle you want, healthcare costs, interest rates and inflation. It may make sense to work with a financial adviser to run projections and define your target income.
Knowing how much income you need each year in retirement ensures you have a well-defined goal to strive for.
It can inform how much you need to save each month and where to invest that money. With a target in mind, you can create a retirement savings strategy tailored to reaching your future income needs.
Tip 5: Seek professional financial advice
Trying to plan and save for retirement on your own can be challenging and stressful. Working with a professional financial adviser, like BDWM, can be hugely beneficial.
An adviser will get to know your specific circumstances and goals, then create a customised retirement plan just for you. They can help with:
- Calculating your target retirement income.
- Recommending tax-efficient savings strategies tailored to your situation.
- Choosing suitable investment products like pensions and ISAs.
- Advising how to allocate and diversify your investments.
- Regularly reviewing progress and adjusting your plan as life changes.
Though it means paying some fees, a good financial adviser provides objective expertise and ongoing support that is well worth the money. They make the complicated retirement planning process much smoother.
Finding an adviser you connect with and trust is key. Speak to contacts for referrals or search online adviser directories. Thoroughly research your options before committing.
Getting professional retirement planning advice can give you confidence and peace of mind that you have the right savings approach.
Don’t go it alone – an independent financial adviser, like BDWM, can help optimise your chances of retiring happy.
How can BDWM help?
Retirement may seem far away, but following these tips can set you on the path to retiring happy. Consistency and starting early are key – begin building your retirement pot today. Small steps now can make a big difference later.
There’s no one-size-fits-all approach when it comes to planning for retirement, which is why getting professional advice is essential. That’s where BDWM comes in.
Our starting point is always you – what are your financial dreams and aspirations, both now and in the future?
Once we understand this, our team of professional advisers will use our years of experience and expertise to create a financial strategy that meets your retirement goals.
With the right preparation, you can enjoy your later years with financial security. Give us a call to take control today and start planning for the retirement you deserve.