Your retirement savings may not be enough: here are 5 reasons why.
Many people come to us with a clear idea of how they plan to spend their retirement. Having the financial security to be able to finish work and enjoy a comfortable lifestyle is often the ultimate goal.
How we save and plan for the future financially can be based on the experiences we have learnt from our parents. But whilst we can pick up good money management lessons, the financial challenges facing each new generation are very different. When it comes to planning for retirement, it’s a completely different playing field.
Our job as financial advisers is to help people reach their future financial goals. With retirement planning, we aim to set achievable investing goals and keep expectations of future income realistic.
Whilst there may be challenges to achieve your goals, there are always strategies to reach them. Starting a tax efficient investment plan as early as possible, and reviewing your portfolio’s performance regularly can be the best first steps. There are many reasons why your retirement income may fall short, and here are five of the most common reasons:
1. Your pension contributions are too low.
Many millions of employed are now auto-enrolled into defined contribution pension schemes which were designed to encourage more people to save for retirement. The problem is that most people are not contributing enough to the scheme, or are not topping up their savings with ISAs or a pension plan held elsewhere. Typically, employees only pay in between 4 – 5% of their salary into their plan, and this is topped up with an employer contribution of between 2 – 4%. To build a decent pension pot, savers could aim to contribute 12.5% of their earnings each month, including tax relief and any employer contribution.
2. The state pension age is getting older.
The age at which you can claim your state pension has been steadily rising, and is set to rise even further. Men and women are now eligible to take their state pension at age 66 and this is set to rise to age 67, and this will be phased in between 2026 and 2028. The age is scheduled to increase again to 68 between 2037 and 2039. Each year the state pension age increases, the bigger the gap you have to fill through personal pension savings. You can check your personal state pension forecast by visiting the UK Government website. You may be able to back date any missing contributions from periods of not working, such as when an extended maternity leave or a sabbatical was taken.
3. You could still be paying your mortgage in retirement.
House prices have soared over many years. This means more people are buying their first home later in life, and taking out mortgages with much larger debt to salary ratios than have ever had to be managed before.
25 year mortgages were once considered to be a long-term loan, but mortgages with a maximum term of 40 years are now becoming the norm. To put this into context, the average age of a first time buyer is now 34 years old, and that raises the prospect of a generation of homeowners not achieving mortgage-free status until they are well into their 70’s.
This means a whole generation of people face the challenge of balancing paying debts against saving for the future. This is where financial advice can really help. Those who are locked into a very low mortgage interest rate may find it financially sensible to invest for retirement, rather than over paying on their mortgage loan. A financial adviser can help work out these calculations.
4. You might have children later and they are more likely to live with you for longer
Fewer people are getting married young and starting a family, with many more choosing to establish careers first. On average, parents are getting older and, because of the difficulties of buying a first home, children are more likely to grow up and live at home for longer. Add in the higher costs of university education, and the concept of being an empty nester and financially secure by the time you are aged 50 seems far fetched.
In years gone by, people in their 50’s saw pension savings as a priority. Adult children living at home and possibly elderly parents to take care of too means financially, this intense savings chapter is not possible to achieve.
5. Your inheritance may be lower than you expect
Many people expect to receive an inheritance and rely on it as the solution to financial problems later down the line, even to entirely fund retirement.
There are lots of reasons why an inheritance may not materialise, or be less than expected. It can be that elderly relatives live longer, and either downsize or use equity release as a way to improve their lifestyle or fund private care. In some cases people simply change their mind as to who their beneficiaries are.
Relying on an inheritance to fund your retirement is risky and should not be seen as a guarantee for the future.
How can I get my retirement savings plan on track?
If you would like to find out more about investing for retirement, or about how you could gift a pension to a younger member of your family, the call 0116 269 6311 or email email@example.com.
Our independent financial advisers are experienced at helping people make their money work hard to reach their life goals.
Past performance is not a reliable indicator of future performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
Our blog is for your general interest. Whether or not it applies to your current financial position, please feel free to share it with friends, family, or colleagues who may be interested.