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In retirement, we expect a continuation of, at the very least, our current standard of living.
Given that we spend an increasing proportion of our lives in retirement and state benefits, where available, are reducing, the need for early, effective retirement planning has never been greater.
However, modern society is told by TV adverts and increased consumerism that immediate gratification is the only way. So how do you marry these two viewpoints?
Basically, the answer is not to delay!
The cost of delaying the savings process can have a dramatic effect on both the amount you need to invest and the impact this will make on your lifestyle. Friends Provident International (FPI) has illustrated this perfectly in their sales literature for their offshore pension plan.
FPI calculated the increase in monthly contributions for a fictional individual who would like to retire at the age of 55 with a retirement fund of $1m. The calculations assumed he kept delaying contributions by a further five years.
If our fictional friend starts saving at the age of 30, he would need to save $1,850 a month to reach his target by the age of 55.
By delaying saving by just five years, the amount he would need to save each month would jump up to $2,670 per month and the older he gets the more he is going to need to save; by the age of 45 he will need to be contributing $7,000 a month to meet the same goal! Not only is this going to be much harder on the pocket (if even possible), the total contribution is substantially higher as the contributions have had less time to grow.
Now $1m sounds like a lot of money, but when you consider current annuity rates for a 55 year old are just over 5%, this only amounts to an annual income of $51,000. This would be lower still if you want to inflation-proof your income!
As such, the questions we all need to ask are:
- Is this going to be sufficient to maintain your lifestyle in retirement?
- Is this enough to do all the extra things in retirement, like travelling, you wish to do?
- What about inflation?
- What about annuity rates falling further?
All these points mean that two things are vital; that you start saving for your retirement as soon as possible, and that you review these savings regularly. What you can afford to contribute to ensure your future is dependent on many factors, including your current financial commitments.
Most advisers will recommend saving in the region of 15% of your income, throughout your career, as a good benchmark for achieving a financially independent retirement. If you have no retirement savings at all, more drastic action may be needed - a rule of thumb would be to divide your age by two and save that percentage of your salary, i.e. a 40 year old would need to save 20% of their salary.
If such saving levels are not possible, at least try saving something - even if it is just $100 each month. After all, the true cost of delay is not achieving your goals and dreams; not the actual cost of saving money now.
See also:
Planning your finances for 2009
Planning your finances for 2009: School fees
Darren Ashley, Managing Director, Candour Consultancy
