Recently, my girlfriend made her first automatic payment into her Retirement savings. At first she felt as if she’d been robbed a little. “You mean I can’t spend this money until I’ve retired?!” But, taking a little bit more time to think about it she understood that she will need to save for the future, so that when she’s too old to work she can live comfortably, right?
It got me thinking, is it even worth saving for retirement? What are the chances I’ll even live long enough to spend my savings? How much do I need to save? And should I be thinking about what I will one day pass down to my children?
As it stands, a person in the UK becomes entitled to the state pension at the age of 68, anyone born after the 5th of April 1978 will have to wait until they reach this age to start claiming.
For me, this means that I will have to wait until the year 2062 before I can start claiming my state pension. But, I plan to retire well before I’m 68. Partly because I am already trying to make the sensible financial decisions at the age of 22 that will allow me to do so and partly because, for men at least, I may only expect to live until 84… that’s if I even live to 68.
This means that I will only have, potentially at most, 16 years to enjoy the fruits of my life’s work, assuming that I am of good health until my time comes. Woman will have a few more years to flash some cash, with a slightly higher life expectancy in the UK of 86.
But should I wait until I’m 68 to start spending my money? And how much might I need if I live to 84 plus?
A survey performed by the Money Advice Service found that about 40% of adults in the UK have less than £100 in the bank. ING even claims that 28% of UK adults have nothing in the bank at all!
Looking at these figures it’s clear that most people are not saving for retirement. I don’t know where you live but I know that if I had to pay even a reasonable amount of rent I wouldn’t be able to make it one month on £500, and I certainly plan on spending more than that in my retirement.
So it’s clear people should be saving something towards retirement. Statistically, I have a very good change that I will reach retirement age and so will need something slightly more substantial than £500 if I really want to have a good time, spending my last few years in a sort of drunken haze travelling the world on cruise ships.
How much will I need to retire?
The full basic state pension for one person is currently £119.30 per week, meaning that if there are two of you living in a home with no mortgage this will probably be enough to live off quite comfortably, if you don’t enjoy going out too often or going on holidays….
So maybe some people don’t need to save money. But, if you’re paying £700 a month in rent each month for a two bed apartment you suddenly have a lot less money. This can be avoided by not renting. Save and try to buy your own home when you’re young in order to avoid this. Simple.
Standard Life has a handy tool for figuring out how much you might need to be making annual in order to live the kind of life you want. When I used the tool, I calculated that I would need roughly £25k each year to fully enjoy retirement. This sum included 2 weeks holiday, basic living costs, costs of owning a car, weekly dinner outings, some shopping and a concert now and then. However, costs can easily rise to £30k + If you want to carry out some home improvements or spend more time travelling.
With the basic pension only providing roughly £11.5k a year I’m going to be needing to use approximately £15k of my own savings each year for almost 15 years (based living to around the average age of death for a man). In other words, £225k, the best part of quarter of a million…
That may sound like a staggering amount of cash. But, playing around with an excel sheet and a few formulas I found that if I could put away just £1,500 a year into investments that returned a very conservative 5% year after year between the ages of 23 and 65 I could end up with £225,214! Perfect – See the power of compound interest.
This figure actually surprised even me and made me feel a lot pressured about saving for retirement!
So now we know what we might need to live comfortably in our final years during retirement and what most peoples current situation is lets look at the Pro’s of not saving for a retirement, spending as much cash as you earn.
Pro’s of not saving for a retirement
Clearly, the most obvious benefit of not saving for a retirement is having the chance to spend all the money that you earn, especially if you’re unfortunate enough not to reach retirement age. A favorite saying of mine comes to mind here. “There’s no point being the richest man in the grave”.
You may get to travel more and spend more on life experiences whilst you’re still young. If you’re not one of these people that have finished A levels / College and taken a year out before university one of your last chances to travel the world, without taking significant time out from your career, will be travelling after university. The majority of people will find it difficult to spend a significant amount of time travelling, say 3 months or more, once they have graduated and found full time employment for a number of reasons:
- Employers don’t have to offer career breaks
- Career breaks are almost always unpaid
- No guarantee of continued employment on return
If you’re not too worried about what the future may hold then take that career break and travel the world! Guaranteed your friends will be jealous.
You have little or no responsibilities whilst you’re young and potentially you have relatives to fall back on, if something goes wrong. This is probably the biggest reason to spend money. If you’re renting a place, all you need to worry about is making that rent payment each month and getting to work. Any money that you have left over can be spent on going out and having fun, knowing that you don’t have to worry about the state of the property market, being kicked out of your home for not making payments when interest rates rise or having kids to provide for.
So, there are clearly some good reasons and even some fun ones as to why you should spend your money whilst you’re young. But, what are the benefits associated with saving for a pension? And is it worth it?
Pros of saving money for retirement
When I talk about saving for retirement I’m not just talking about a pension, there are a whole range of investments that you can be making to secure your financial future.
If you’re planning on spending your golden years travelling in style, rather than travelling in your younger years with a stinky backpack, you’re going to need to start squirreling money away from a young age.
If you’ve set out on the savings path you’re probably looking to save up and actually buy your own home. The average length of a mortgage in the UK is 25 years and the average age of a first time buyer in the UK is 30. Assuming everything goes well, the average person in the UK could be looking at being mortgage free at the age of 55.
This means that after the age of 55 almost all the money you make at the end of each month gets to go into your pocket. Spend a little on utilities and maybe a car and do what you will with the rest of it. Ideally, save it for retirement.
Not having to pay rent or mortgage at the end of each month isn’t necessarily associated with saving for retirement but it will give you significantly more freedom in later life than someone that is still having to find money for rent.
There’s free money to be had when saving for a pension! Most companies will have a pension scheme you can subscribe to. Not only that, why you put money automatically into a pension scheme it put in before it’s taxed. Money will come out of your pay check directly into the pensions plan, without facing any tax. Furthermore, the company may contribute something extra. E.g. 5% of your salary each month.
Having more than £500 in the bank will give you a sense of relief. Just knowing that you can survive for at least 3 – 6 months without work will make day to day life less stressful. It’ll allow you to deal with unforeseen emergencies like a broken down car or an unexpected health issue. Furthermore, knowing that you’ll be able to continue life in the manner that you are accustomed to in retirement will certainly put a smile on your face.
When you do retire you can do so knowing that you’ll be able to live comfortably in your own home, you’ll be able to travel the world and go out and do nice things, rather than be still paying rent and living on the basic state pension income.
Lastly, you’ll be able to leave something behind for your kids. When your time does come having money available to pass on is important. You wouldn’t want your lasting memory to be a pile of debt.
I hope you can see the benefits of saving for a pension and that you are all doing so!
Ben – Guide to a Million