Mind the gap!
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
We’re all getting older. And, as the saying goes, it’s better than the alternative.
The bad news is that with more of us retiring early and living for longer most people aren’t saving nearly enough for their retirement. This shortfall, the difference between what provision we should be making and what we are actually putting aside, is called the Savings Gap.
What we do know is that most people need to save more than they are. And the earlier you start the better.
It’s also worth bearing in mind that State Pension, is likely to get smaller and the age you receive it go up as the years progress.
Retirement Savings Gap – Years Saved vs Life Expectancy
Source: World Economic Forum Analysis
Here are some of the most frequent questions asked by our clients.
Which is better, pension or ISA?
Each has its own advantages. With a pension, your contributions are made from tax-free income but when the pension is paid it is subject to tax. With an ISA there is no tax relief on the contributions you make but any income is paid out tax-free. ISA investments are more accessible than pension funds which can be a good thing or bad thing. It depends on how disciplined you are.
There are also separate rules for pensions and ISAs on how much you can contribute and how much you can build up in each vehicle. The answer is that it’s probably good to have both.
How much will I need in retirement?
Everyone is different. It depends upon your lifestyle. What plans you have for retirement. What age you plan to retire.
Everyone has their own idea, but research True Potential has carried out, polling over 40,000 people since 2013, suggests the average income required to live comfortably for someone retiring now is around £23,000.
What size of pension or savings pot is required to generate that sort of income?
Again, it’s not an exact science and depends upon a number of factors, but a reasonable rule of thumb is to reckon on your savings generating a sustainable return of 5% over the years. This means your savings pot needs to be 20 times the income you require.
To put this into context, to generate an income of £23,000 you need savings of 20 times that or around £460,000.
It’s a big figure. Even bigger when you factor in the effects of inflation from now until retirement and the fact that your contributions will need to keep pace with the rising cost of living. That’s why the earlier you start to think about it, the better.
What sort of growth can I expect from my investments?
Potential growth is subject to lots of variables, particularly around how much risk you feel comfortable taking with your money.
That said, using long term numbers from MorningStar, a Balanced portfolio might be expected to return an average of 5.5% per year and an Aggressive portfolio a return of closer to 7%.
But these are long term averages. Obviously, returns fluctuate from year to year and some years are better than others. Markets don’t go up in a straight line and there may be short periods, or longer periods, of volatility when markets are falling.
These times are uncomfortable but they’re part and parcel of long term investing and actually volatile markets that go up and down generally benefit long term regular savers by allowing your monthly investment to buy more units when prices are cheaper and fewer when prices are higher, so bringing down the average cost of your investment. It’s called pound cost averaging and ultimately volatility is the friend of the regular investor.