It may seem a million miles off, but if you want a comfortable standard of living in retirement you better get saving soon – that is the message from finance industry experts. According to large-scale research by Aon in the US, a 25 year old with just a 401(k) plan will need to put aside 15% of their income to retire at 65 with “adequate resources.”
Wait until 30, and the figure is 19%. And all of this assumes that your employer makes an almost matching contribution!
It’s the same story for workers in many other western nations. In the UK, for example, HSBC found that retirees were expected to live for 19 more years, yet only had the savings to cover, on average, 7 of these years.
The age-irrelevant action plan to a better retirement
The picture surrounding retirement finances looks pretty grim. Inflation is shrinking pension values in real terms and 2013’s best annuity rates read like the worst of just a few years ago (further reading, see: inflation hits pensions and annuity rates 2013).
That said, the worst thing you can do, no matter your age or the stage of your career you are at, is to ignore them. Follow these steps to ensure you are sailing in the right direction with your retirement finances.
Make a retirement plan
The first step to doing this, advises the US Department of Labor, is to figure out your net worth; that is your total assets minus your debts. Ideally, you want this to show a positive number but do not be disheartened if you are in the red, as many are.
Key to a productive retirement plan is outlining targets, specifically for the income you need in your retirement. Most authoritative sources recommend aiming for between 70 to 90 percent of your pre-tax salary.
Now you have your target figure, work out how much you need to be setting aside each month in savings to reach this goal. Consider this figure as a recurring expense and factor it in to your monthly budget, much like your rent and other bills.
Do a pension health check
This can make a massive difference as saving in to poorly chosen pension plans can be expensively inefficient. Speak to a certified financial advisor who has access to the open market and can compare pension providers and their various plans to find you a suitable option.
Speak to your employer about company pension schemes
Get as much information from your employer about any pension schemes that you are either enrolled in or entitled to.
Evaluate the value of these and also look to maximise any ‘contribution matching’ that they offer. This is when your employer commits to matching some or all of your own contributions into your pension. The reason many employers do this is that there are lots of tax incentives surrounding pensions.
Tighten up the financial belt
It’s an obvious one but it bears stating clearly. Doing a health check of your monthly expenses is a great way to “trim the fat” on your spending. Do this at least bi-annually and you will be shocked at the amount of wastage you will save. Mint.com is a useful tool for monitoring your finances.
Tackle bad debts first
Identify the worst debt you have and make paying that off a priority. By worst debt, we mean the loans you owe with the highest rate of interest. Interest on debt is generally higher than it is on savings so it is logical to clear as much debt away as possible before fully committing free funds to your saving plans.
If retirement is on the horizon, shop around for the best annuity rates
The amount of monthly income you get from your pensions depends on the annuity you buy. Get your best available annuity rate and you will receive a lot more cash each month than if you end up with one of the lesser plans.
The difference in monthly income you will get between the best annuity rates and the worst is typically around 10-20%. Obviously, that is a sizeable amount of extra money you could be spending on hobbies and holidays in your retirement!
The most important thing you can do, no matter your current financial and life situation, is to be conscious about your finances and your retirement planning. That is not to say you should spend all day worrying about it – quite the opposite – but do take it into consideration when planning your spending and saving.
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