No one really knows how much they need to save to retire because so many variables apply to the equation.
Everyone has their own solution that takes into account factors like when you retire, how long you will live, how much you spend and how much you have managed to save during your lifetime of work.
The problem is retirement savers look at what they can afford to save now rather than how much they will need when they retire.
As people age, they invariably realise they have not saved enough and are caught in a money spiral where they have to spend for food, somewhere to live and all those day-to-day bills while putting money into savings and a pension as well.
Invariably few have enough cash for both and something has to give – and people being people, they tend to live for today rather than save for tomorrow.
Setting a financial target
Financial advisors suggest a good way to set a cash target for retirement is to take half the income you spend at 40 years old.
Scottish Widows calculates this as £23,500 a year.
Take away guaranteed retirement income, such as the state pension of £155 a week, which is £8,060 a year.
That leaves £15,540 a year to find.
If you have other income from savings, pensions or investments, then factor those figures in as well.
Do not rely on an inheritance or downsizing property, because these can go awry and leave you high and dry.
Generating retirement income
To generate an income of £15,540 a year at a return of, say 3%, means you need a money pot of around £518,000. That figure is your savings and investment target.
Don’t panic if that looks unachievable. Few people have pensions and savings to power that sort of return.
The key is to keep on saving as much as you can as often as you can.
The takeaway is do not work backwords by saving what you can and hoping that you will have enough money to retire.
Instead, work out what you are likely to need as an income and aim for this financial target. You may not hit it, but at least you have a strategy.
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