We are all guilty of present bias. Delayed gratification is rarely preferable to instant satisfaction – and as investors we are increasingly short-termist. But when it comes to pension provision, you have to think long term – or be prepared to see a significant drop in your standard of living.
The problem with investing for retirement is it seems a very long way off for so many of us. The State Pension age is now 67, with an average life expectancy of 80 years. Seemingly more pressing financial obligations call out to be prioritised; children’s education, family holidays, DIY. But if you start investing for retirement early enough and the burden is far less; put off saving into a pension and the sacrifice have to make is much greater to meet the same financial goal.
The two most important factors when saving for retirement are how much you pay in and how long you save for; good investment performance, low charges and shopping around at retirement all help but if you haven’t saved enough, for long enough, you’ll always be struggling.
Compared to starting at age 25, if you start saving for retirement at age 22, you’ll increase your pay-out by around 20%, by contrast if you leave it until 35, you’ll get around 50% less.
A useful rule of thumb is the half your age times your salary: whatever age you start saving at, you should look to invest half this number as a percentage of your salary. So, start at age 30 and you should save 15% of salary; at age 40 it would be 20%.
Once you have made the decision to invest in your future, we’re here to help. This week marks the end of the 2016/17 tax year on Wednesday April 5 – and the beginning of a new one on Thursday. If you have yet to take advantage of your annual pension allowance, do so before midnight on Wednesday night – and while you’re considering your option for this tax year, get in early with the your 2017/18 allowance.
For investment ideas, back to basics education and advice from the experts read Morningstar’s Guide to Planning for Retirement.
Monday: Back to Basics
What is a pension and why should you have one?
Pension Savers Stung by Lower Annual Allowance
How to Invest in Your 20s and 30s: Get Over the Present Bias
Why You Can't Afford Not to Invest
Tuesday: Workplace Pensions
Making the most of your workplace scheme
What is Pension Auto-Enrolment?
How to Get Free Cash from Your Employer
Should You Stay Invested in the Default Pension Fund?
ISA and SIPP Investors' Favourite Funds
Wednesday: What the State Provides
The new flat-rate pension and the future of State support
Born After 1961? Be Prepared to Work for Longer
Act Now to Beat the New Tax Year
ISA Investors Favourite Stocks: Oil and Utilities
How is Your State Pension Changing?
Thursday: Building a Pension Portfolio
How to DIY your retirement saving
New Lifetime ISA Launches Today
Investor Views: I'm Investing for My 4 Year Old Twins
How to Build an Investment Portfolio
Friday: Investing in Retirement
With life-expectancy increasing, your pension pot has to last
How to De-Risk a Portfolio in Retirement
How Retirement Spending Affects Withdrawal Rates