Any good rules of thumb for how much should be saved by 30?

Monday1

Hi

I am 26 (27 soon) and currently have £19,000 in my pension pot, my contribution to my pension is currently £7,000 pa.

My question is this a reasonable amount of money to be saved for my age? Are there any good rules of thumb of how much should be saved by a certain age?

While I very aware of the importance of having a pension, I have to admit that I am terribly good on the details having just used the life style option on my companies stakeholder scheme since I started saving when I finished Uni.

I would like to retire to later that 65.

Thanks

property.advert

Do you own a property ?

You cannot look at financial assets in isolation. No point in having just a pension or just a house or nothing in the cash emergency fund (12 months income as a safe ploy) etc. but you'll need kids' university cash and all manner of other things.

It is about getting the right balance but there are times when funding one over another is prudent.

ermine

is this a reasonable amount of money to be saved for my age?

Depends how much you want to retire on, and how much your lifestyle costs. You can't pluck a figure out in isolation.

You need a capital sum roughly 20-25 times the income you need at retirement. Although there are lots of cheerleaders for compound interest, over a normal working life of 40 years it seems to roughly double the amount in real terms you have saved if you invest in index trackers and the stock market performs in future as it has done for the past couple of decades, which is a big assumption but you have to start somewhere. Obviously if you're Warren Buffet you can do much better, but most of us don't.

Therefore in you case assuming you retire at 65 and save the same amount in real terms as you are now you'd have an income of roughly 21k in today's money, which looks pretty good to me. (65-27)*7000*2/25

You need to understand where these assumptions come from before relying on that, however. And real life tends to get in the way, in the form of buying a house and perhaps having kids, both of which seriously nuke your savings capability

Monday1

Thanks for your comments.

I do own my own property in which I have about £30,000 in equity. I have £7,500 in cash (offsetting the mortgage) and £8,500 in my SAYE scheme.

I think I am going to need to save alot more to get 25 times my current salary.

Regards

HappyMJ

25 times the wanted income not necessarily current income. You won't have mortgage payments and you will no longer be saving for a pension in retirement so you can knock quite a bit off for that. i.e current salary £40,000 with £10,000 being spent on mortgage payments and £10,000 being saved towards a pension and your SAYE scheme means you need £20,000 to have exactly the same lifestyle and not forgetting the state pension that you will also get of around £5,000 per year means you need a private pension income of £15,000.

£10,000 times 40 years and divided by 25 is £16,000 a year so it's very close.

ermine

I think I am going to need to save alot more to get 25 times my current salary.

You need to take a 360 degree view of your requirements. Firstly, do you need to have your current salary when you are retired? Most FS pension schemes targeted 50-66% of final salary or so. You'll have no mortgage, and your house therefore provides you rent-free living. Discharging my mortgage hugely reduced my costs - each £1000 you don't pay in mortgage is at least £1320 less you have to earn (more for HRT payers). You can knock off £7000 that you're paying into your pension too, so that's £175000 less you have to save in total (in real terms).

Retirement savings is all about matching your spending, not matching your income. Driving your spending down is the key to retiring, particularly retiring early. As you get older, the value you place on Stuff gets less, both because you have accumulated a lot of it and also addressed your housing needs. So it probably is nowhere near as bad as you seem to think. OTOH it's better to save a little more than not enough, but with your savings rate you're doing a lot better than the majority of people your age!

One thing that's almost always worth doing if you can manage is to pay anything above the 40% tax threshold into a pension, because it's rude to let the Government steal so much of your earnings. But if you are in an expensive area or have expensive tastes you may have to pay HRT. I can't imagine a City banker being happy with an effective earnings of about £42k

JoeCrystal

Very nice work with a pension so far. In my case, I am just going to be 26 soon and paid in almost £12,000 so far but just paying in £291.63 per month at the current tax year. I am quite pleased about the progress so far, considering I just started it in late 2010.

It just occurred to me that while saving £7,000 per month in pension scheme is beneficial, have you consider the possibility that you may wish to retire earlier than 65? In this case, it may be ideal to have separate savings in S&S ISA to carry you over until you could draw upon your pension in good amount. I have no intention of retiring at 65 but hopefully earlier but hmm... I do not think I can do that at the current financial situation.

I was wondering about something about your company stakeholder pension. In my case, I have to use an IFA in order to use private pension scheme (it AMC is cheaper than my company's Stakeholder Pension and more funds as well) for example and my employer does not contribute to it (which is annoying but nothing I can do about it alas), so I was wondering if your employer contribute toward your pension scheme?

Just bear in mind that it is also important to increase your contribution either by RPI/CPI or Earnings or both as inflation will erodes the value of fixed contribution away. For example, £30 per month was good enough decades ago but now? Not even enough to meet many personal private pension's minimum requirement of £100 per month. In my case, I will increase my contribution to £307.96 per month as I increased it by 5.6%

Either way, at least you made excellent start toward your retirement and you will be glad of it, I am sure of it!

I did however came across a rough guide mentioned by dunstonh that you should have £35,000 of pension fund value by age of 35. Clearly, you will exceed that amount by wide margin providing if you keep up your contribution .

Cheers

Joe

Loughton_Monkey

Rules of thumb exist, but I don't place much value on them. Specifically, the amount saved by a certain age is a rather false comparison anyway. As a graduate on a 4 year course, I didn't start work until age 22. My brother left school at age 16. So he had 14 years of provision by age 30. I only had 8.

Your career path, earnings potential, and lifestyle is individual to you. Your next door neighbour will be totally different.

Even at age 26, it is perfectly possible to make assumptions on (a) your future salary, (b) your future spending, and (c) the savings/investment growth you might get - all compared with assumed future inflation. Given that you probably have another 30/40 years before retirement, this calculation will be a bit false and simplistic, but it will give you a very good idea at the 'macro' level.

At the very least, such a model informs you very well as to the dynamics of your spending/investment ratio, and its implications for retirement income. Every year you update it with another year's 'actual' and more informed projections for the future, it can give you 99% confidence that you are on track (or not).

At age 30, I had a 'reasonable' amount in pensions, but this was dwarfed by the value wrapped up in house equity and other (non pension) savings. The only 'rule of thumb' that really matters is the value of your 'wealth' [including pensions] at chosen retirement date. A comfortable retirement can be had if (a) by then you own your own house, and (b) you have total assets [including pension pots] in the order of 20 times your 'comfortable' annual spending.

Monday1

My problem is that retirement is so far away, I really have know idea how much I might need when I do retire. I do live within my means easily at the moment however who knows what the future holds. I do like the idea of retiring before 65 but I am not hopeful.

With regards to contributions, I am lucky because my employer does contribute 8% of my salary towards my pension and I do also benefit from salary sacrifice and my employers contributes all of their NI savings as well.

I do like the idea of an stocks & shares ISA however I am not very confident that I could pick decent funds so most of my none pension savings going into my offset mortgage.

My SAYE is due to mature in May so I might look to move some of the money I make from that into my pension though I am not sure if this possible. I am looking to forward to it as it the share price is currently about 4 times of the price of my options but it does mean that CGT may become an issue. To complicate matters I work a US listed firm so the shares are in dollars. It might be worth seeing an IFA I think but again I am not really sure.

atush

I think you are doing pretty well with your pension so far, and if you keep up the contribs (and increase them with salary over time) you will do well.

But apart from your SAYE, you don't have equity exposure. So I would look at increasing cash and equity savings too. "Your SAYE is 100% exposed to one share- your employer- so I propose you need to diversify.

Marine_life

The main problem with estimating is the question of your future earnings path i.e. if you expect to have the same earnings (inflation adjusted) equivalent for the rest of your life then estimating where you are now relative to where you need to be would be easy.

However, throw in a couple of job changes, a marriage, a couple of kids and various other detritus and its get complicated.

I would set up a regular (annual) dialogue with an IFA to review progress and start to think about the future.