Imagine swapping your 9-to-5 routine for unlimited leisure time, all while maintaining your financial independence. It’s not magic, it’s what happens when you save for retirement.
In this guide, we discuss five easy ways to save for retirement, helping you shape that secure, comfortable future you’ve been dreaming of.
Ready to start your journey to great retirement years? Let’s get going.
Why should you save for retirement?
Think of it as building a treasure chest for your future self, a little at a time. With every penny you save, you’re adding another brushstroke to that beautiful canvas of your future life, where your hard work has paid off, and you’re enjoying the fruits of your labour.
Statistics show that 19% of the UK population in 2022 were 65 years or older, a number expected to reach roughly 24% by 2042.
Now, what does this mean for you? As more people reach retirement age, there’s going to be more strain on the State Pension. And with only 57% of the UK population saving adequately for retirement, there’s a glaring gap to be filled.
This is why you need to save for retirement. These savings are your safety net, your pillar of support, that’ll enable you to maintain the lifestyle you enjoy now, even in your golden years.
There’s no denying the comfort that comes from knowing there’s a cushion to fall back on when the rush of working life gives way to retirement.
When you save for retirement, it’s easier to not fear a time when the regular paychecks cease, yet the bills continue to roll in.
Now that we know that saving for retirement is important, what are the easy ways to go about it?
5 Easy ways to save for retirement
1. Automating your savings
“Paying yourself first” is a fundamental principle in personal finance, advocating for you to allocate funds to your savings or investments before managing bills or discretionary spending.
The idea is simple: treat your savings like a bill that needs to be paid each month. Before you pay your rent, your utilities, or splurge on that fancy dinner, put away a part of your paycheck into your savings or pension pot. It’s like a small act of kindness to your future self.
Now, to make it even easier, you can automate it. Many employers offer schemes where you decide an amount, and it goes straight from your paycheck into your savings or pension account each payday. No extra effort, no temptation to skip a month and it helps you to save for retirement. You can open a competitive interest savings account and automate your contributions monthly from your bank.
In the UK, individuals usually save for retirement with a pension scheme. You can start one as soon as you get a job, but you can’t tap into it until you’re 55. Plus, you get a tax break on what you put in.
If you’ve got a lump sum, you should consider a fixed-rate bond. It’s a savings account with a fixed interest rate for a set time, usually between six months to five years. You’ll know upfront what you’ll earn. When it ends, you can take your money and do it again, or toss it into your pension.
2. Starting small
There’s an old adage that says, “Mighty oaks from little acorns grow.” In the world of saving and investing, those “little acorns” are the small, consistent contributions you make to your retirement fund, and the “mighty oak” is the substantial nest you build over time.
Let’s say you manage to save just £100 per month from the age of 25 and let’s assume an average annual return of 5%. By the time you hit 65, your total contribution of £48,000 would have grown to over £150,000 due to the power of compounding.
In a nutshell, compounding is the process where your savings earn interest, and then that interest starts earning interest too. It’s a snowball effect – your savings keep growing, not just from the money you put in, but also from the interest you’ve already earned.
It’s like putting your savings to work. And the earlier you start, the more time your money has to grow. So, even if it’s a small amount, don’t hesitate to start your journey towards a comfortable retirement. Every little acorn counts.
3. Using retirement accounts
Employers provide workplace pension schemes where putting money in there reduces your tax liability as any amount invested into a pension account is pre-taxed money. Depending upon your age, you can choose the funds provided by these pension schemes such as high risk high reward, medium risk and low risk. If your employer offers a workplace pension scheme, enquire about the enrolment process.
Individual Savings Accounts (ISAs) are not usually retirement accounts but can be used as one. There are 4 types of ISA accounts: cash ISAs, stocks and Shares ISAs, innovative finance ISAs and Lifetime ISAs. Contributions to an ISA may not reduce your current taxable income, but the account’s earnings grow tax-free, providing a significant boost to your savings over the long term.
For an ISA, you can approach a bank, a building society, or an investment firm to get started. Setting up these accounts is straightforward.
Another type of retirement or pension account is SIPP where one can take charge of its money and decide where to invest like which stocks/bonds to buy. All gains are tax-free and funds cannot be withdrawn till retirement age.
Once you’ve set up your account, you can decide how much you want to save for retirement regularly. Remember, every contribution, however small, gets you one step closer to a financially secure retirement.
4. Investing for Retirement
Investing can be a game-changer when it comes to saving for retirement. Rather than leaving your savings idle, investing can put your money to work, potentially yielding higher returns over the long term.
Consider target-date funds, sometimes referred to as “set-it-and-forget-it” investments. These are funds that automatically adjust the mix of stocks, bonds, and other investments based on your retirement date.
When you’re younger and have more time to recover from market downturns, the fund will lean more heavily into riskier, but potentially more rewarding investments like stocks. As you approach retirement, the fund will shift towards safer assets like bonds, protecting your savings.
Robo-advisors are another excellent option for beginners. These are digital platforms that provide automated, algorithm-driven financial planning services with minimal human supervision. You simply input your financial information and retirement goals, and the robo-advisor will create and manage an investment portfolio for you.
Regardless of the investment route you take, understanding your risk tolerance and time horizon is critical. If you’re young and retirement is decades away, you might be comfortable taking on more risk for potentially higher returns. As you near retirement, you’ll likely want to opt for safer investments. Remember, investing always comes with risks, so it’s essential to do your research and consider seeking advice from a financial advisor.
5. Making lifestyle changes
Embracing a more mindful approach to your finances can free up additional funds for your retirement. Start by identifying areas where you can reduce unnecessary expenses and budget better.
For instance, consider brewing your own coffee instead of buying it daily from a café, or preparing meals at home instead of dining out frequently. Cutting back on subscription services you rarely use, like streaming platforms or magazine subscriptions, can also add up to substantial savings.
You can use the Know Your Dosh renewals feature to track your yearly renewals so that you can renew in time without getting auto-renewed and paying higher amounts. This feature will also help you identify overlapped services where you might be paying two providers for similar services.
Prioritize saving over impulsive buying decisions, such as delaying the purchase of non-essential items or considering second-hand options for certain purchases. A frugal mindset and cost-saving opportunities can gradually increase your savings without sacrificing your quality of life.
These small changes, when practised consistently, can make a significant difference in the growth of your retirement savings.
Over time, the money saved from these lifestyle adjustments can accumulate, contributing to a more robust retirement fund.
What is the 4% rule for retirement savings?
The 4% rule is a rule of thumb used in retirement planning to determine the amount of funds a retiree should withdraw from a retirement account each year. It serves as a guideline for preserving your retirement savings throughout a projected 30-year retirement period. The rule suggests that in the first year of retirement, you withdraw 4% of your total pension pot. For every subsequent year, the same amount is withdrawn, adjusted for inflation.
For example, let’s say Emily has a retirement fund of £500,000. In the first year, she would withdraw £20,000 (4% of £500,000). If the inflation rate for the year stands at 2%, the next year, she’d withdraw £20,400 (adding 2% inflation to the original £20,000).
This method continues annually, adjusting each year for inflation, to provide a steady income throughout your retirement.
Is 40 too late to save for retirement?
When it comes to retirement planning, the saying ‘better late than never’ is fitting. Sure, you’ve got some catching up to do, but with some smart steps, you can still cross that finish line in style.
Here are some key steps you can take:
- Boost your savings: Try to save more of your income than you might have in your 20s or 30s. Aiming for 15-20% can make a big difference.
- Join your work pension: Lots of jobs come with a pension that your employer pays into too. It’s like they’re giving you free money for your retirement, so make sure you’re signed up.
- Try a lifetime ISA: If you’re between 18 and 40, you can get a Lifetime ISA. The government will give you a bonus on top of what you save, up to £1,000 a year.
- Mix up your investments: Don’t put all your eggs in one basket. Having a range of investments can help protect your money.
- Revisit your budget: If you’re spending money on stuff you don’t really need, try putting that cash towards your retirement instead. It all adds up.
Starting to save for retirement at 40 might mean you have to play a bit of catch-up, but it’s definitely not too late to get on track. And remember, it’s always okay to ask for help, so consider chatting with a financial advisor to make sure you’re making the best choices for your future.
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