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How much should I save for retirement?

Working out how much to save for retirement is the crux of your retirement plan. Every penny you invest in a pension now is a penny that will grow and compound for years to come.

On the other hand, you only live once, and you may not want to endure much more frugality during your working life than you need to in order to meet your retirement income goals.

The most important factors when figuring out how much to save for retirement are the ones you can control:

  • Your expected rate of return is under your control only in the sense that you might choose between a tour of the Georgian streets of Bath or the slums of Rio. You can’t predict what will happen but one option is much safer than the other.
  • Time horizon is partially under your control.
  • Your contribution level, or savings rate, is almost entirely under your control.

The uncertainty of the future makes me err on the side of saving and investing more now, while I still can.

  • Overshooting my target means I can retire earlier, at the cost of some shiny things now.
  • Undershooting means a future me will have to cling to the treadmill with fading strength, or face up to a retirement less golden than the one I’ve got in mind. I’d rather avoid that fate.

By saving more money, you reduce the chances of one of the less controllable factors scuppering your plans.

Save more as you age

Your contribution levels must also take into account the arch-nibbler – inflation – imperceptibly eating away the value of your pension contributions over time.

Most retirement calculators assume that you’ll increase your contributions every year to keep pace with inflation. Make sure you check your calculator’s inflation assumptions so you understand how your savings rate needs to adjust.

Now is also an ideal time to go back to your budget planner to subject your outgoings to the pointless tat test.

What are you spending money on that you can happily live without? The more unnecessary expenses you can whittle away, the more you can save, and so the less you may need to live on in the future.

Remember that working out how much to save for retirement is just one part of this equation. Check out our main article on how to create a pension plan for more on the other factors you need to consider.

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{ 8 comments… add one }
  • 1 TB at BlueCollarWorkman August 9, 2012, 5:43 pm

    This is something that my wife and I have actually not spent much time talking about. We put some money away, but not with much forethought. An actual plan and actually seeing what numbers we need is a great idea. And one that we should’ve done a LONG time ago!

  • 2 ermine August 9, 2012, 11:24 pm

    I wonder how you’re getting any sleep these days TA. Cracking series BTW – you’re on a roll!

    I know you meant ‘save more as you age’ in terms of compensate for inflation, but I’d argue you can do better than that. Your thirties and early forties are financially tough, particularly for those with kids. If you experience any career progression, then you’re more likely to hit 40% tax as you age. There’s an argument to be said for that you should try and arrange your lifestyle as to never need to pay 40% tax, and divert all income over that to a pension scheme. Saving £100 for every £60 you put in is a lot easier than saving £100 for every £80 you put in, so there is very definitely an argument for saving more in real terms as you age. It’s also a lot more interesting and therefore easier to engage with emotionally, as you are closer to benefiting from the loot, and arguably you are reducing political and legislative risk to your retirement plans as the Government has fewer years to change the laws around pensions such as the 25% tax free penson commencement lump sum.

  • 3 The Accumulator August 10, 2012, 1:20 pm

    @ TB – it’s scary stuff initially but well worth doing. I felt much better once I knew the truth and decided to do something about it. Good luck!

    @ Ermine – All good points. I actually do this myself. The HR department were so shocked that anyone would want their bonus diverted into their pension that I rather got the impression I was ploughing a lone furrow on this one in my company.

    Still, I wonder how much further ahead I’d be if I wasn’t a late-starter. If I’d saved something, anything in my 20s then I’d be closer to financial independence now.

  • 4 Savvy Scot August 10, 2012, 6:01 pm

    Great post! I am only 24, yet I am conscious of saving for retirement. While I am lucky enough to have a final salary pension, I have already started an ISA for retirement in addition to other stocks. While my contributions are small now, I intend to ramp these up as my career progresses and my salary increases.

  • 5 The Accumulator August 10, 2012, 10:08 pm

    Good stuff, Savvy Scot. Wish I’d had your sense at your age.

  • 6 Kevin Mzansi August 12, 2012, 11:10 pm

    The “arch-nibbler” – inflation… Love it!
    It really does come down to what you are and are not in control of.
    Nice post!

  • 7 AB August 14, 2012, 10:05 am

    It scares me to think about the financial struggles that some of my generation will have when they reach retirement. Saving needs to start when you hit 30, if not before, but I still see many of my friends and colleagues turning a blind eye. Let’s hope that lottery ticket comes good…

  • 8 David August 18, 2016, 1:42 pm

    I agree with ermine in saving more in real terms as you age. Those approaching 55 can now look upon pension saving as a short term investment. With UK tax rates of 49%-65% once NI (including employers) is factored on along with the child benefit/personal allowance grab back. A word on overshooting though. With the lifetime allowance of just £1m you could arguably start saving too early when only obtaining basic rate tax relief. You don’t want to be at your lifetime allowance aged 55 as you are likely to end up with a big tax bill at 75. £10K/annum (based on 5%/annum growth) from the age of 20 will get you to £1m at 55. But if left untouched it will be £2.5m at age 75. The alternative is to take the £50K/annum growth out but that most likely would mean paying higher rate tax. Probably best to aim for about 60-70% of LTA at 55, especially if you still continue to work. You can always put in an extra £7,500/annum between 55 and 75 without incurring the wrath of HMRC with regards to recycling.

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