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How much do you need to save for old age?

In the latest in series explaining the basics of investment and saving, author of 'The No Spend Year' examines pensions.

How much do you need to save for old age?

What do you think when you hear the word ‘pension’?

Maybe you think ‘old people’, or ‘rich people’, and there’s a good chance if you’re in your 20s or 30s that you think they’re not for you.

You’re never going to retire, you’re going to work until you drop, slumping over your keyboard after tapping out your final email. Yeah, we all think that.

None of us think retirement will happen to us, is for us, or that we should bother saving for it. But we’re wrong: we’ll get old and we won’t want to spend the latter part of our life commuting or indulging in office politics.

As I wrote a couple of weeks ago, the government is already thinking ahead for us and if you’re employed in a company and earning more than £10,000 a year then under auto-enrolment you will automatically be placed into your workplace pension.

However, the government isn’t thinking far enough ahead because the mandatory pension contributions that have to be made under auto-enrolment are too small.

At the moment just 1% of your wages go towards your pension, your employer adds another 1% and the government gives you a little top of of 0.2% in the form of tax relief.

It’s a start but it’s nowhere near enough for a decent retirement. That’s why the government is increasing the amount you and your employer contribute and the amount of tax relief you get.

By 2019 auto-enrolment contributions will increase to a 4% employee contribution, 3% employer contribution and 1% tax relief - a total of 8%.

Now this may seem like enough but, I’ve got bad news: it’s not.

The general consensus is that a 15% pension contribution will get your savings to a point where you can live comfortably in old age. It’s unlikely that your employer is going to give you more than the compulsory 3% and you’re more likely to win the lottery than for the government to cough up anymore.

That means you’ll have to save the extra 7% you’ll need to have a decent retirement and put 11% of your wages aside each year.

It’s a lot of money but the fact is you’ve only got a limited number of choices when it comes to retirement savings: work longer, save more or go without in old age.

If you want to retire at a decent age and with a decent income then you’ll have to save more. There’s no way around it.

Another rule of thumb to use when deciding how much to save for retirement and which is more, or less, depressing depending on your age is: save half your age.

If you’re 20 years old, then you should be saving 10% of your wages, if you’re 30 then save 15%, and if you’re 40 then put away 20%.

I don’t know any 20-year-olds saving 10% of their wages. Everyone I know in their 20s and 30s is saving for a house deposit and this is probably true for most people in that age bracket. Just remember that you will have to start saving for retirement at some point and the later you leave it, the more you’ll have to save.

It’s not easy to commit money to the future at the expense of spending today. It’s difficult to see yourself as a pensioner, not working, relying on your savings to live - it’s like asking you to save money for a stranger.

But the time will come when we’re all there. It’s a lesson I’ve only just learned myself.

I stopped paying into a pension when I went freelance because I no longer receive employer contributions I thought ‘what’s the point?’ and instead concentrated on overpaying my mortgage.

I figured that once I’d paid off my mortgage early I’d be able to throw all my spare cash at a pension then but it could be too late. I need to start thinking about the future and putting some money aside for my old age.

That’s why I’m so interested in the new lifetime ISAs that are coming out in April. I can save up to £4,000 a year and the government will give me a 25% top up - that’s £5,000 a year I can put towards retirement.

You can access the lifetime ISA, without penalty, after age 60 or before to buy your first home. If you access it outside of these constraints you forfeit the government bonus and are charged 5%. While I wouldn’t plan on accessing the money before age 60, as a freelancer it would be nice to know I could get my hands on the cash in a real emergency.

So roll on April, when I can start saving money for old-aged Michelle - hopefully she won’t have to work until she’s 90. 

8 comments so far. Why not have your say?


Feb 16, 2017 at 19:59

"I stopped paying into a pension when I went freelance because I no longer receive employer contributions I thought ‘what’s the point?’ and instead concentrated on overpaying my mortgage."

I started Stakeholder Pensions for my children as soon as it was allowed and I tried to explain to them the wonderful effect of compound interest and, particularly, the fact that it is the first pounds in that really work for you. To be honest, they couldn't have been less interested and even now as young adults don't really see the point of pensions at this stage. But think about it, a pound matched by an employer's pound plus tax relief and compounded over 40 years is really worth something. Your mortgage will evaporate via amortisation (your repayments) and inflation whilst the underlying asset on which it is secured is likely to grow. I think that may have been the wrong choice, Michelle!

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magic beans

Feb 17, 2017 at 11:47

We did all that then the government changed the rules.

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John Roycroft

Feb 19, 2017 at 09:28

The question: 'How much do you need to save for old age?' isn't answered.

I decided that I would want a minimum of 24k pa for myself and my wife and a minimum of 18k when just one of us was left.

I also want to give 50k each to my two children for university and I would like any inheritance from our parents to go straight to the boys.

I then calculated how much I would need to save to hit these targets.

I am on track to reach the minimum savings target in 5 years (when I am 56). The first of our pensions kicks in when I am 60 and the last one when I am 69 (so between 56 and 60 I need to earn enough to live but the pressure to save should be lifted).

Any gap between our income and the 24k target will be made up through the return on investments or work. At age 67 I project that I will have achieved 24k and 32k when I am 69.

Ideally I would like to have a higher income than 24k but I don't think it is achievable. We could decide not to have any holidays for the next 10 years but then again with our boys not far from leaving home it seems too austere not to have time away as a family.

How I achieve these targets is a separate issue and made complicated by the fact that I live overseas.

In short, younger workers should calculate their target retirement income then work out how they are going to achieve it.

Certainly, saving early makes a massive difference as Jeffian explains. Once I have achieved our target retirement income I will make a start on the boys' retirement fund.

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Feb 19, 2017 at 13:58

We would need to save much less for our pensions if the providers stole less from us.

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Raymond Hurley

Feb 19, 2017 at 20:19


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Feb 19, 2017 at 23:29

Am I imagining it or has this article been re-written?

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Long Gone Expat

Feb 20, 2017 at 11:54

Jeffian is right re compounding and the real thing to do would be to stuff as much away as was possible, I didnt say "desirable" but as much as possible as early as possible and let compounding do the rest.

I have seen calculations which show that someone who saves about 30% of their income in their 20's need not save very much at all by the time they are 50.

Save the money they would have drunk would go a long way but none of us does - sadly.

John Roycroft I agree too that you should have some holidays as you cannot get back lost time with your family. Also there is the balance scenario we all worry about where we don't want to die having done nothing just as much as we don't want to run out of money in retirement.

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Feb 20, 2017 at 12:14

The story I used to tell my children was about the blacksmith who was called out to shoe a horse. The horse needed 4 new shoes and it took 8 nails to fix each shoe. He quoted the man £400. "Outrageous" says the horse owner. "Well I'll tell you what" says the smith "I'll only charge you 1p for the first nail, 2p for the next and so on". "OK" says the man. The bill came to £42,949,672.96.

Yes, they weren't very impressed either, but it makes the point!

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