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Subjects don’t come much thornier than this! With so many elements to take into account, many of which are unknowable at any given moment in time, it’s impossible to give a definitive answer to this question. Many of the factors which will influence the answer are outside our control – the state of our health, the value of our savings when we retire and even the age at which we will retire, as governments move the goalposts from one year to the next.
An individual’s expectations also mean that there is not a one-size-fits-all answer. Whilst I may be planning to spend my twilight years cruising around the world in luxury you may be happy to stay at home to help look after your grandchildren. Our pension requirements will vary accordingly.
However, just because this is a difficult question to answer, doesn’t mean that we shouldn’t tackle it. In fact, it is imperative that we do. Having a retirement savings plan, even a flawed one based on estimations and assumptions, is critical to being able to enjoy a comfortable retirement.
Pensions experts often use the rule of thumb that a retiree will need savings of 11 or 12 times their salary at retirement age to see their lives out comfortably, but there are many problems with this approach, not least the fact that unless your retirement is imminent, you may not have a clue how much you will be earning at that time.
While pondering this issue, I recently came across a book by financial expert, Charles Farrell, which outlines a system of ratios basing estimated retirement requirements on current age and income. In Your Money Ratios: 8 Simple Tools for Financial Security, Farrell has calculated that the following figures are necessary if you wish to have 80% of your pre-retirement earnings at your disposal when you retire. 80% is considered to be the level required for a retiree to maintain their standard of living when they no longer have to pay the costs related to working, such as National Insurance contributions and commuting costs:
|Age||Required level of savings|
|35||1.4 x income|
|45||3.7 x income|
|55||7.1 x income|
|65||12 x income|
If this strikes panic into your heart, don’t worry. While 80% of your pre-retirement earnings is a great amount to aim for, you could still be very comfortable on less. By juggling your rate of saving, the age you wish to retire and your expectations, whatever your current situation you can still achieve a level of investment to see you comfortably through retirement.
The most important thing is to not delay any further. A financial planner can help you get to grips with the answer to this important question, and critically, can help you put an investment plan in place to ensure that you enjoy a financially secure retirement.
If you would like help with your retirement planning get in touch today for a free, no-obligation consultation with a qualified financial planner.