Dreaming of the day you’ll retire?

Start planning now to avoid nasty surprises later

How do you feel when you think about pensions?

I know they’re not the most exciting thing in the world, but they’re incredibly important for us all.

People don’t wake up in the morning and say, ‘Hey! I can’t wait to invest in a pension today!’ But they want what a pension will be able to give them – and that’s the ability to retire with more lifestyle certainty.

When you’re expecting a certain thing to happen but something else does, it can be very disappointing.

So how can we reduce the surprises associated with a pension and increase our probability of a secure retirement?

Often, I use the analogy of the dentist when I talk to my clients about retirement. People always hope their teeth will stay in good shape – and for the most part, they will.

But if you don’t visit the dentist for 25 years, the condition of your teeth won’t be down to them – it’s your responsibility.

The same is true with your retirement planning.

While it’s great having a pension, you can’t sit back and assume all the work has been done. Here’s everything you need to know about how to take care of your retirement fund going forward.

How much should I save?

There are dozens of guides to help people target their retirement income, but it all depends on how much you want to spend in retirement.

I have some clients who are very happy spending time with their family at home and barely touch their money, while others are booking their next cruise while enjoying the current one.

As a guide, you need to have saved around 300 times the monthly income you require. So, if you need a monthly income at retirement of £1,000 per month, you should be aiming to have a pension fund of £300,000.

How to do it

When it comes to pensions, there are three variables you can influence – the money that is paid in, the growth it achieves and the length of time it’s invested for.

Firstly, ensure you pay in as much as you possibly can, and certainly as much as you need to receive matched contributions from your employer, if they are available.

If you pay in 10% and your employer will match this, you’ve doubled your money in one day. No investment will give you a guaranteed 100% return like this – it’s free money.

As a target, aim to contribute 12.5% of your take-home pay. Some people may fall off their chair reading this, but when you consider you need to save up enough money to last you 25 years or more, you’ll understand why.

You can include your employer’s contribution in this 12.5%, but if you’re late to the retirement plan party, you may have to play catch-up or accept you’ll need to work later than others.

Secondly, you need to ensure you are invested to grow your pension.

The simplest way to achieve this is by using a lifestyle index fund.

This ensures the risk of the pension suits your age profile to retirement, which means you’ll automatically take more risk when you’re younger, and less as you approach retirement.

Thirdly, if you’re not on target to retire early, you’ll need to allow a few more years before you access your pension. The rule of 72 means your pension should double every 10 years or more, so consider deferring your pension to allow it to grow.

Finally, don’t leave it to chance. Review your finances regularly and check in with a professional every few years. Retirement can be the best chapter of your life, if you plan for it.