As obvious as this advice sounds, it is seldom applied to retirement saving, when hitting your target can be the difference between living out a comfortable old age, or not.
Those saving into a Defined Contribution pension - be it a workplace scheme or private pension, such as a Self-invested Personal Pension - build a pot that they can keep track of, but translating that into a retirement income is not straightforward, so it’s hard to know what will be enough to give them the retirement income they expect.
None of us really know how long we’ll live or what spending demands will be placed upon us during retirement, which could last many decades. Then there’s the unpredictability of financial markets which will also partly determine the income we have to live on in retirement.
With all that uncertainty, a target level of saving that would give you a decent standard of living in retirement would be a great thing to have. It wouldn’t make hitting your target any easier, but it would allow you to know in good time how you’re progressing and to make changes along the way to improve your chances.
That’s what a new initiative from Fidelity aims to achieve. Our global retirement savings guidelines provide a set of simple ‘rules of thumb’ to show you whether you’re on track for a retirement income that will maintain the lifestyle you are used to - a common aim for most people.
Via some simple online tools, you enter details such as your age, the age you believe you will retire, the income of your household (rather than simply what you earn alone) and the amount you have saved up to now.
The tools will then factor in details like the state pension to establish how much retirement income you’ll need on top to maintain your lifestyle.
The results are presented in three ways: a figure showing how many times your household income you will need saved in order to retire; a percentage of your household’s income that you need to be saving now to get there; the rate at which you can safely drawdown on your savings in retirement so that savings pot will last 25 years or more.
Within the calculations are many assumptions about investment returns and your circumstances in retirement. The assumptions are based on historical returns and common scenarios - for example that your household will go on to receive two state pensions in retirement.
Clearly these assumptions can’t account for every circumstance and they may not apply in your case. The point, however, is that these should be the starting point for you to understand your own circumstances better - the level of retirement income you expect and the income your current saving will result in.
Have a go for yourself and, if you’re still some way off your targets, don’t be disheartened. It’s never too late to make changes that can improve your retirement income, and even small changes can make a big difference given time.
If you want encouragement, another Fidelity tool demonstrates the power of increasing your pension saving by small amounts. It shows what a difference contributing just an extra 1% of your salary now will make to your retirement fund.
For example, a 30-year-old today earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £58,273 in their retirement fund. And the contribution required now for a chance of this reward? Less than £6 a week - although tax relief on pension contributions means the actual cost is even less than that.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.