Over time the term ‘retirement’ has picked up an air of foreboding. Every day it seems, there is a new headline warning us of the impending doom and gloom associated with an aging population, the burgeoning strain on state pension provision and an ever-increasing retirement age that will see many of us working into our seventies and eighties.
However, the good news is that by putting the right plans in place and being careful to avoid common mistakes which will negatively impact our savings, the power to carve out the retirement we want lies in our own hands.
Here are five of the most common pitfalls savers fall into when it comes to planning for the future and how they can be avoided…
1. Assuming you can live off of a state pension
Picasso said, “Action is the foundational key to all success”. When it comes to your pension, he was right on the money. We cannot rely on the state pension – not only does the state pension age keep rising (many millennials now can expect to be working into their seventies) but the amount of income it will provide on its own is far less than most people expect.
The reality is that this will need to be supplemented. Whether through a work place pension, property or other investment. The sooner we accept this and start saving the more chance we have of building up a sizeable enough nest egg to see us through retirement.
2. Taking a shot in the dark
It’s hard to be motivated to save when you don’t have a clear idea of what your saving for or of what your end goal actually is. Finding the will to put away a portion of your hard-earned cash each month based on the basic idea that one day you will stop working and will need an income isn’t the easiest thing to do. But having a clear picture in your mind of the home you want to live in, holidays you want to go on or things you want to be able to do day to day can be the first step towards palpable motivation to put that money aside every month. The next step is to work out how much money you need to save to make the retirement you want possible – to set a tangible goal to save towards.
One way of doing this is to use the ‘4% rule’. To do this you start with your desired annual income and multiply it by 25. This should give you a sense of how much you need to save into your pension in total. For example, the average household spend is around £26,000 per year for a comfortable retirement. Using the 4% rule this means you would need to save around £650,000 in total for your pension. Obviously this is subject to change depending on individual lifestyle e.g. how many holidays you want to go on, how extravagant they are, how often you eat out, whether you have a paid off mortgage or are renting etc. But, it can be useful as a rough guide.
3. Sacrifice your pension as a cashflow quick fix
This pitfall is particularly relevant for millennial savers. Financially speaking – they have it harder than generations before them. Property prices are at record highs, many people were hit by top-up fees to pay for university and the cost of living is higher than ever before. It may be tempting to opt out of your workplace pension scheme, especially if you are saving for a mortgage or have student loans or other debt to pay off. But even sticking to the 3% minimum contribution to be enrolled on your workplace pension scheme is far better than opting out of Auto Enrolment and missing out on the 2% employer contributions and government tax relief so you can free up a bit of cash for the here and now.
Try working out how much you spend each month on your morning coffee, eating out and other luxuries and see where you can cut back. While this may feel irritating at the time it is by far a better option than sacrificing your future security.
4. Forgetting to plan for the unexpected
Having already established that planning is key when it comes to pensions and retirement it is also important to remember that sometimes life will throw things at you that you didn’t see coming. Whether this comes in the form of unexpected healthcare costs, children or other family members in need of help, divorce or even another housing market crash (extremely problematic if property is a key part of your retirement plan). You can’t plan for everything. But, you can do your best to have a buffer in place to protect you if you do get hit by the unexpected.
5. Forgetting about previous workplace pensions
This is easy to do. Especially when you are going back 10 to 20 years to pension schemes you might have had early in your working life. Chasing these down is usually a job that sits in the back of our minds before getting forgotten, them remembered, then forgotten again. Forgetting about this previously saved money is like throwing it away – when it could be used to boost your current pension pot.
The other risk in leaving your previous pension pots to languish is that they could be in poorly-performing funds that will not maximise your pot. There may also be hidden pension charges having a negative effect on your pension by diminishing your pot once you’ve stopped paying into it.
Putting the right pension provisions in place can feel like a daunting task. But it really just comes down to putting aside what you can while you’re working so that it can build interest and look after you while you’re not. By taking a bit of time now to seek advice and understand the best way to invest your money (and what to avoid) you will be able to relax in the knowledge that your post working life will be taken care of.