Have you started thinking about or planning your retirement yet? If not, new research shows you're not alone.
A recent study reported by MoneyAge revealed that more than a quarter (28%) of those aged between 45 and 65 haven’t started planning for retirement. For 56- to 65-year-olds – the group approaching that milestone – the figure is 25%.
Even though retirement may seem like a long way away, it’s of the utmost importance to start planning for it as early as you can. Thinking about what you’d like to do with this chapter of your life can help you to work out what income you’ll need to achieve your goals and, consequently, how much you should be putting aside now.
There are lots of different benefits of starting to save towards retirement early, so continue reading to discover why it’s important to build a strong retirement plan regardless of your age.
The earlier you start saving, the less you’ll need to save overall
For many, saving for retirement may seem like tomorrow’s problem: why should you save for something that is potentially years or decades away?
Regardless of your age, it’s essential to start planning and saving for your retirement as early as possible. Indeed, starting to plan this phase of your life early has many benefits.
Firstly, saving earlier could mean you need to save less overall.
For example, imagine two people, Sarah and Rachel, started saving for retirement, and both were making monthly contributions of £200. If Sarah started making contributions between the age of 22 and 32, while Rachel started making contributions between age 32 and 42, they would have both saved £24,000 in total.
If both then invested the money until the age of 60, and their investments grew by 5% each year, Sarah would have £125,000 saved, while Rachel would only have £77,000.
As you can see, since Sarah started contributing to their pension 10 years earlier, their savings had more time to grow, resulting in a larger pension pot for retirement.
Pension savings can benefit from compounding returns
Compound returns occur when you earn accumulated gains on anything you’ve invested over time. It’s essentially “gains on gains”. This can often result in a small pot growing to a much larger one with enough time if you invest your retirement savings early.
For instance, if you paid £1,000 into a pension fund with growth of 5% each year, you’d earn £50 returns in year one. Then, if you left your investments as they are, and you continued to earn 5% growth each year, you’d have earned £52.20 in year two, and a further £55.13 in year three.
As you can see, the longer you leave your investments for, the more you receive thanks to compounding returns. And, while these returns may seem low initially, they quickly accumulate over time.
So, the earlier you start planning and saving for retirement, the more you’ll benefit from compounding returns over the long term. After all, Einstein once called compounding returns the “eighth wonder of the world”.
Your State Pension may not be enough to live from comfortably
As of the 2022/23 tax year, the State Pension Age is 66, though this is set to increase to 68. When you do reach this age, you’ll typically receive a State Pension if you’ve made National Insurance contributions for at least 10 years.
While this State Pension will provide you with a solid bedrock of income, the new full State Pension in 2023/24 will be £10,600, or £204 a week. It’s unlikely to be enough to achieve all your post-work goals – and you can only draw it at State Pension Age. So, if you want to retire early, you’ll likely need to have made your own arrangements.
When you have a dedicated pension fund that you’ve been contributing to for years, you can gain the peace of mind that you’ll have “enough” to live the life you want when you eventually retire.
You could be retired for longer as life expectancies rise
Rising life expectancy is often seen as a great thing, though it’s important to factor this into your retirement planning.
In fact, the Office for National Statistics reports that life expectancy in the UK is expected to reach 90.1 for men and 92.6 for women by 2045.
As life expectancy continues to rise, people could be in retirement for a much longer period of time. This means that you’ll likely need more money saved to ensure you can live the life you want during retirement.
This is another reason for planning out your retirement as early as possible. Thinking about your future plans now means you’re ideally placed to build up the pension pot you need to enjoy your post-work years – whatever age you live to.
Get in touch
Planning for retirement on your own can often be a complex task, so seeking the help of an expert can give you peace of mind. Please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help you.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.