Andy Cumming Head of Advice at Close Brothers Asset Management highlights what you should be doing to ensure that you have a comfortable retirement
People must choose to divert more of their salaries into their pension schemes to ensure they have the same standard of living in retirement as the fortunate generation who have enjoyed generous DB provision.
Trying to guess exactly where share prices or the value of government bonds will go tomorrow, next week or next month is essentially impossible. Financial markets fluctuate all the time, so sometimes the value of our savings will fall. But over the long term, we can expect them to grow. Timing when to enter or exit the market is barely more than guesswork. It’s time in the market that counts. And that means starting young. But this is not the whole story. Simply saving more and starting young is unlikely to enable people to meet their retirement goals.
Savers must also take enough risk if they do elect to invest in the financial markets. This is where the big opportunity lies. Younger savers have more scope to accept a higher risk approach in the early years, giving savings greater potential to grow. Smart saving also means older savers can make the markets work for them too as we shall see. Taking risk means you could balance today’s needs with tomorrow’s goals.
Saving smart in action
Cautious savers must put by almost five times as much for the same result. A 25 year old earning £25,000 and beginning her pension saving today might want eventually to retire on an income of £16,000 (which would equal to £35,000 in 40 years, assuming inflation is 2% per annum) at the age of 65. To achieve that means accumulating savings of roughly £500,000. If she saved in cash, earning 1% she would have to put aside £6,900 per year, over a quarter of her gross income. If she opted for the higher risk approach, appropriate to a typical saver of her age, she would only have to set aside around £1,500 per year. To meet her income goals in retirement someone with a very cautious approach to risk would find it impossible to live well today and save enough for the future.
By contrast, someone who adopts a higher risk approach, accepting that in some years her savings might fall in value, should need to set aside far less of her income as savings today, enabling her to enjoy a reasonable standard of living today and in retirement.
(These figures assume inflation is 2% for target income and contributions, total investment returns of 7.7% per annum, and no investment charges)