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When should you start saving for retirement?
Financial freedom in the later years of our lives is something we all aspire to. Having worked tirelessly for decades, the thought of being left with little but a state pension on which to rely and indulge isn’t particularly palatable.
At the time of writing, a state pension is worth around £115 per week. Even with inflationary rises, that isn’t likely to help you maintain a comfortable living standard, let alone leave you with surplus funds with which to spend on yourself.
It therefore falls to you to save and build a retirement fund throughout your working life. But when should you start this process, and how?
Do your homework
Before mapping out your retirement saving plan, you’ll need to do some rudimentary sums. Consider how much money you’ll need to live on once you retire. The basic stuff is the most important; utility bills, remaining mortgage payments – you need to be able to live comfortably and not fall into debt.
When should I start saving for retirement?
If you’re reading this blog early enough, start saving for retirement when you begin earning. Even if it’s a small amount each month, it’ll get you into the habit of doing so.
If you’ve been working for a number of years and have passed the age of 30, you’ve got a bit more ground to make up. Just remember the golden rule: the later you start saving for retirement, the more you’ll have to put in each month.
As a result, starting your pension pot as early as possible in your working life will have a lesser effect on your cash flow yet provide a far bigger bounty when you retire.
Compound interest is a tricky thing, but it can be a useful reminder of why it is sensible to start saving early for retirement. Put simply, compound interest is calculated on the accumulated interest of previous periods. It is, in essence, interest on interest!
The results can be somewhat stark. For example, if someone invests £1,000 into a pension when they hit the age of 30, after 35 years of investment growth at 4% per year, that amount will become just £3,950 when they hit 65.
How should I save for retirement?
The most popular way to save for retirement is the use of a pension fund – a tax-efficient saving pot which can only be withdrawn from once you reach the age of 55. There are, however, some alternatives.
Cash ISAs are different to ‘normal’ savings accounts as you are not charged tax on the interest you earn (up to a pre-set annual limit). If you’re a higher rate tax payer, that means you’ll avoid the 40% tax on savings interest. For those earning below the higher rate, it will be a saving of 20%.
You can now save just over £15,000 per year in a tax-fee ISA. Therefore you will be sheltering it from tas, it is a great way to save for retirement.
National Savings & Investments (NS&I)
NS&I is a government-backed saving scheme offering taxable and tax-efficient benefits for those saving for a retirement fund. There’s even a Pensioner Bond aimed at people who have already retired and are looking for a way to save on a fixed rate.
So, when should you start saving for your pension? The answer is simple: as early as possible. We live busy lives and it is easy to keep putting off the idea of building a retirement pot. However, the sooner you do it, the less you’ll need to set aside each month to pay for it.
Try out This is Money’s pension pot calculator to see how much you’ll need to put away.