Exactly how much to save into a pension is a common question that no-one seems to be able to answer. It all seems so far away, although as I veer closer to my 50th birthday it becomes a little more pressing than it was in my youth.
I suppose the first number I need to think of is how much do I need every year? While I might not be interested in designer clothes or racehorses or five-star hotels when I’m retired, I certainly can’t live on thin air. The basic state pension is worth about £8,000 a year which doesn’t seem very much. I’d like a bit more than that. As a rule of thumb, most people aim for two-thirds of their annual salary.
Then there’s the age you’d prefer to retire to consider. You can normally start taking money from personal pensions currently at 55 although this is set to rise to 57 in 2028 when the state pension age also increases, this time to 67. Most of us will be waiting longer than we thought to get our hands on the cash.
Once you’ve identified those numbers, you’ll have to work out whether they’re actually achievable. I’ve found a very handy online pension calculator from Pension Bee. There are other calculators at the Money Advice Service and Hargreaves Lansdown but I think the Pension Bee one is clearest.
All you need to do is punch in five numbers: your desired annual retirement income, your preferred retirement age, the value of your current pension, any monthly contributions you’re making now plus any employer contributions. You can include the state pension if you like. You don’t even have to push go: the calculator will show you whether you’re on track or not.
I decided to find out what I needed to save every month from now if I wanted to retire at 67 on £26,000 a year. For fun, I added in that I had zero savings already and no employer contributions. And guess what, to reach my target £26,000 a year, I’d have to save at least £780 a month from now on.
Of course, that’s impossible to do. But a more realistic £200 a month would only net me an annual pension of £12,856. That’s including the state pension.
Luckily I do have some savings already which slightly improve those figures. And I hope to have stopped paying mortgages and child expenses by 67. Even so, it makes you think. If we want a gilded retirement, we’re going to have to save much more on the way there or work a great deal longer.
See our SMM guides to pensions for more inspiration.