You have a picture of what your retirement years will be like. There are some classics that should be booked in for your retirement years on every Millennial’s bucket list. If your dream is anything like mine, it includes sunny holidays, cheap wine and no need to worry about waking up and battling through the daily commute.
See Also: Top 10 Reasons to Retire Right Now
It’s a long way off. I have no idea how much my dream will cost, but I’m not beneath downgrading to Lambrini if I need to. Just don’t make me keep on commuting so long I need to use a walking stick to get around. I am liable to find myself whacking people with it if I don’t get a seat on the tube, and that’s no good for anyone.
So given the hazy nature of our typical retirement plans, is it any wonder that many of us question whether it’s worth saving or investing for them now? Who knows where we will be by then, thirty or forty years down the line. And even more of a mystery is what we will actually need by that time to maintain the lifestyle to which we have become accustomed.
Where do we even begin?
What sort of stash might you need in retirement?
Recent research showed pensioners in the UK take an average of three holidays a year, crack open the bar before seven, and join Facebook. With three meals out a month, a couple of weekends away and 17 day trips to fit in every year, you’re going to need a few quid. But how much?
Nest Pensions in the UK found that in retirement, the income threshold for comfort was around £15000 per year. Below that level, and people struggle with basic costs, and above that wellbeing and happiness rises sharply up to an annual income of £20000. Households who have more than £20000 per year in retirement continue to grow in satisfaction, but actually at a less striking rate.
Arguments for managed retirement planning
The government want you to do it. Your mum wants you to do it. Your boss even - apparently - wants you to do it. But why is investing in retirement a good idea?
State pensions are for surviving. Not living.
You don’t need to save for retirement, surely, the state will pay your pension? Well yes. A whole £115.95 per week at present. This is assuming you have worked (and therefore paid National Insurance Contributions), paid voluntarily into the NI system, or received benefits due to being unable to work, for thirty years - otherwise you will get even less. Live, work or retire abroad and it all gets even more complex.
The state pension adds up to just about £6000 per year, well below the 15 grand cut off for living stress free in retirement. If you had any doubts about the need to save for retirement, this answers it, right?
You will lose your teeth before you gain your state pension.
If that’s not enough, consider this. If you are in your twenties now you won’t receive a state pension until you are at least 68 years old in the UK. Recent changes to the pension system have pushed up the age you can start to draw anything, and there is no saying it won’t go up further in the future.
Projections are that pensionable age will rise to age 70 by the 2060s, based on expected increases in life expectancy. It might be safer if you don’t bank on getting your hands on anything at all from the state, and rely solely on your own plans. Particularly if you want to stop working before hitting three score years and ten.
Retirement lasts a really long time.
The reason that state pension age is getting later is because life expectancy has increased dramatically in the UK over the past decades. This increase had not prompted any change in retirement age until lately, when a formula was adopted which is intended to mean that pension age increases in line with life expectancy. The intended result is that people will spend a third of their adult lives in retirement. Whichever way you look at it, that’s a long time to have not-quite-enough money. Better get saving.
Why turn down free money?
This is the killer argument for most. If you have the opportunity to enter an employer backed pension scheme in which a proportion of your salary is paid by your company into your pension, then saying no is effectively turning down free money. You will be required to invest as well, and your money will be tied up for longer than any other investment you might choose, but checking out the pension small print from your boss before you make your mind up is just a no brainer.
Go for broke - arguments against investing for retirement
So I’m playing devil’s advocate just a little here. But life is for living, right? I mean you could get hit by a bus tomorrow, couldn’t you? Or even better, win the lottery. What’s the point in putting money away for retirement, even if the state pension isn’t going to be enough to fund my sneaky Lambrini habit?
You can work for as long as you like.
Since age discrimination laws came into force and meant that employers could not force older workers to retire simply due to their age, many people have chosen to work for longer, ignoring the previously assumed retirement age of 60 or 65 years old. And why not? According to research, ’old age’ now begins at around the age of 74, with an ever increasing number of people projected to live to receive their telegraph from the queen. No need to save for retirement when there is no real end to a working life in sight, anyway.
Retirement doesn’t necessarily mean stopping work entirely.
And even once you do decide it’s time to slow down, many more people are treating retirement not as a chance to stop work altogether, but to remain economically active in a different way, taking on part time work for example. With a ’portfolio lifestyle’, of several smaller sources of employment rather than one full time job, a more common phenomenon, you don’t need to retire all at once anyway, but can slowly reduce your working over time.
The compromise - Investing for the future doesn’t have to be locked in a pension pot
Perhaps the biggest issue for many people when deciding what to do to fund retirement is that their money will be effectively locked in until their hit a certain age - usually 60 or 65 years old. The prospect of paying into a locked pot in the early years of your career, when finances are typically tight, is not always appealing. But simply kicking the decision into the long grass isn’t a smart move either - before you know it, you’re a decade into your working life and trying to cook up schemes to get you on the beach with a drink in hand sooner rather than later.
A compromise is to invest, but not specifically in a pension pot. There is no reason why money saved now towards property, in quality stocks or other thought through investment vehicles, shouldn’t ultimately form part of your retirement planning. Take proper financial advice before committing, and start early to see your money grow (and allow you to hop off that treadmill before you fall off.)
You only live once. Well, the other way to look at it is that you only die once. You have to live every day. Having a financial plan for retirement makes that prospect a little more promising.