Can you picture your retirement? Chances are if it is more than 10 years away you will struggle to visualise a time when you won’t be working. And when you can’t imagine a circumstance, human nature means you are unlikely to prioritise it.
Choosing to favour the here and now is known as present bias. Humans prefer immediate awards to delayed gratification – the well-known study conducted with children offering them one marshmallow now or two marshmallows in five minutes proved impulse control is no easy feat.
As a result, short-term goals are more regularly achieved than long-term ones. We can use this to our advantage in many environments; weight training, project based employment, learning a language, reading a difficult text. But when it comes to saving for the future there are no short-cuts.
Early Bird Catches the Worm
The financial challenges facing Britons aged 35 or younger today are wide-ranging. Compared to generations past there is less job security, rising rental costs, out-of-reach property purchase prices, lack of wage inflation – and a reduced chance of inheritance lending a helping hand thanks to a greater life expectancy for their elders.
So it comes as no surprise that three quarters of British Millennials expect their quality of life to improve or be maintained in retirement according to Scottish Widows. At the very least, this is wishful thinking.
According to Scottish Widows, this group expects to retire early too, at 63 – while the Government’s State Pension calculator suggests that this age group will not claim their retirement benefits until at least aged 68.
So if you can’t rely on the State to fund your retirement, at least for those first five years, you need to start saving now. Currently the minimum contribution to a work place pension is 1% of salary but this is not enough to secure a comfortable retirement.
A 30-year-old earning £30,000 needs to invest 15% of their earnings to be able to enjoy a pension of third of their salary – £10,000 – allowing for inflation, according to calculations by Hargreaves Lansdown.
If you delay saving for retirement until the age 40 and you will need to save 21% to achieve the same level of income.
Worried About Locking Your Cash Away?
Many people are put off saving for retirement by the restrictions placed on withdrawals. Once you have saved cash into a pension you have to wait until you are least 55 to access a single penny. ISAs are tax-efficient savings accounts that do let you withdraw your cash should you need to.
As well as taking advantage of your workplace pension – it is, after all, free cash – consider opening an ISA for rainy day savings. The habit of saving is easily formed; arrange direct debits on payday to your cash or investment ISA and once you have built up a rainy day fund, switch this monthly contribution into your workplace pension. You will have formed the habit of sacrificing this monthly amount, and still have the ISA pot for unforeseen costs.
