How much should you be saving for your retirement?
In most cases, the answer to this question is more than you’re putting in now! The minimum that you should be putting aside for your retirement plans, if you’re free of unsecured debts like credit cards and loans, is 12.5% of your income.
But why 12.5%? Because it’s the first hour of an eight-hour working day, so the first hour you work every day goes to paying yourself before anyone else, including HMRC. That’s not the maximum proportion I recommend – it’s the minimum. If you’re nowhere near 12.5%, then it’s a case of trying to build up to it.
An important step in doing that is to cut out all unnecessary expenses and follow my Bank Account System to reduce your outgoings.
There’s no hiding that 12.5% is a chunk of anyone’s income, and we need to enjoy life now as well as in the future; we want to take holidays, have a great Christmas with the kids, enjoy new experiences – retirement is not the target of our life.
12.5% is a starting point. Some people will think, ‘no problem’. Others will think I’m off the planet, because every month they have more days left over than pay cheque.
That comes back to step 2 of my book The Money Plan: get financially well organised. You’ve got to know what you want in life and have a plan in place to get there. You’ve got to get your mindset right, which is why I spend about one-third of The Money Plan on financial mindset. It’s that important.
If you are miles away from your targets, go through your expenditure items and see if you can squeeze them down. Look at all payments coming out of your account and ask the holy trinity of questions about each: do I need this, do I want this, can I get a similar experience for less elsewhere?
You’ve got to plan for your future, and 12.5% is just the start; if you’re in your 50s or 60s with little in your pension pot, you’ve got to make big sacrifices to put more away so you can make your pension income last longer in your retirement.
With that said, I’m realistic. If your employer pays a significant contribution to your pension, say 10% or even 15%, then that can make a big difference. You might even decide to redirect your savings onto your mortgage.
The 40/40/20 principle
After all unsecured debts are repaid and the financial fundamentals such as emergency cash, a will and power of attorneys are in place, I refer to what’s left over between your income and expenditure as a snowball, a surplus.
A good way to be financially organised is to take that snowball and allocate it 40/40/20: 40% goes to overpaying your mortgage, 40% goes into your retirement plan, and 20% goes back to you to enjoy today. I repay 20% back to enjoying today because I strongly believe that although we need to plan to ensure we have sufficient income for when we decide to stop working and retire, we should not live our life for our retirement – for the last quarter of our life, the 40/40/20 rule helps us achieve this financial balance in life.