Planning for your financial future
Planning for retirement earlier increases your likelihood of retiring comfortably. This is due to the fact that the earlier you start saving, the more time your investments have to benefit from compound interest - a powerful investment force which Albert Einstein is reputed to have referred to as an ‘Eighth Wonder of the World’. Compound interest is the cycle of earning interest on your investment plus its accumulated interest, which can help your investments to rapidly snowball over time.
You may live in retirement for longer than you think. Life expectancy has continually increased over time, due to improved lifestyle behaviours and advancements in medical science. That’s great news, but from a financial perspective this means a longer retirement period and higher levels of retirement savings required to meet our future living costs.
To illustrate this, I’ll use an example of a 30 year old female in the UK today called Trisha. Trisha has an average life expectancy of 88 years. She has a 25% chance of reaching 96 years of age and a 10% chance of becoming 100. Assuming Trisha wants to retire aged 65 and cease working at that point, she could be in retirement for 35 years and will need a sufficient pot of money to fund that period of time. The full State Pension is currently £9,339.20 per year (for those with 35 qualifying National Insurance years) and this would start for Trisha at age 68. Trisha will need to make sure that she has enough retirement savings to maintain a good standard of living at retirement for up to 35 years.
You can calculate your life expectancy on this ONS link.
See also the Government’s State Pension Website.
Pension savings are an important aspect of retirement planning. These long-term savings plans are extremely tax effective and keep your money invested over time, until you need to access it at retirement. Through the workplace you also usually benefit from an employer contribution, which helps to grow the value of your pension fund. This employer contribution is free money for your future and it’s worth finding out if you are taking advantage of this at your workplace.