It is a question that has confounded people for generations: how much is enough when it comes to saving for retirement?
The unfortunate truth is that no one can know for sure. Our desires and needs in retirement change – as do our incomes during the course of our lifetime. That is before mentioning many of life’s other uncertainties.
The investment industry’s general rule of thumb is to save at least 15 per cent of your pre-tax income each year.
That’s assuming you save for retirement from age 25 to age 67. Together with other factors, this broad rule should help you achieve the same standard of living you enjoyed in your working years when you reach retirement although this is not guaranteed.
The rise in retirement savings could perhaps be attributed to the growing realisation that people can no longer rely on government provision in the form of state pensions to help significantly fund retirement.
“We have to take individual responsibility and understand better for ourselves how much we need to save.”
However, the constant changing of the rules has undermined investors’ confidence, so much so that some don’t even see the point in trying to save specifically for retirement at all.
Avoiding saving for retirement is not the answer. It creates bigger problems further down the line. But there is also potentially an issue for those that are uncertain as to whether they are saving enough.
Our surveys found that where there was an element of uncertainty, people tend to save less – not more. Those investors who describe themselves as undecided as to whether they are saving enough for retirement are only saving 13.9 per cent of their income. That is less than the recommended 15 per cent.
Perhaps one of the most difficult aspects of saving for retirement is making it a priority, and picturing your ‘future self’.
How will the future you want to spend your time? How much money will you want to spend? And where will you want to live?
And if these answers aren’t immediately clear, it’s easy to fall at the first hurdle and simply never think about retirement savings until you really have to – by which time it may be too late. Historically this has been true, with many people failing to make later life a priority.
However, the Schroders Global Invest Study 2020, of more than 23,000 people who invest from 32 locations around the world, shows that this attitude is changing.
It revealed that pension investing is a joint top priority when it comes to investors use of disposable income (see table, below). This is a far cry from just three years ago when only 10 per cent of people considered investing in their pension first.
There is no easy answer. However, avoiding saving for retirement is not it. It just kicks the can down the road.
We have to take individual responsibility and understand better for ourselves how much we need to save or learn to live with less income.
The best advice is to save something, preferably as much as you can afford, from as early as possible. But always speak to a financial adviser.
This article was by Rupert Rucker and published on the FT Adviser website.