Don’t let perfection be the enemy of good

Planning for retirement when you’re starting late

Everyone knows that you’re supposed to start saving for retirement early, but that doesn’t always happen.

Preparing for retirement is a lot like planting a tree. The best time to do it was 20 years ago. The next best time is right now.

The first step is pretty simple. You need to start saving. It doesn’t really matter what vehicle you decide to save into – pension, ISA, savings account – the thing that makes the big difference is the act of saving in the first place. The choice of vehicle makes a difference, but it’s really just fine-tuning. In short, you need to save as much as you can bear.

I know that, normally, I say that you need to plan everything out and have everything in place before you take any concrete steps. In this case, however, you know that saving as much as possible is going to be a big part of the plan, so you might as well start while you’re still figuring everything else out. This is not the time for paralysis by analysis. You want to start stuffing money into your savings.

Once you’ve started saving, you need to figure out everything else, including if you need to save even more. The place to start is to identify where you are financially – if you are asking directions to a destination, it helps to know where you’re starting from!

Once you’ve worked out your current position, the next thing to decide on is where you’re trying to go. So, you need to know how much you are likely to want to spend, once you have retired. A common way of approaching this is to look at your income now and to assume you would like a particular percentage of this when you retire – sometimes called your replacement ratio. In the olden days, if you worked for a company for long enough, they would give you a pension of 2/3rd or half of your final salary, and this is probably how this method came to be used. But this method is probably only slightly better than taking any other wild guess at the income you will need in retirement! There are just too many variables for this to be a rational approach, and you will need capital, as well as regular income, when you stop work.

The better approach is to work out a budget for retirement, based on what you want to do, and how much it will cost to accomplish. Whilst this might be more work, it means that you can work out a plan which suits your requirements. If you have no idea what you’ll spend in retirement, it’s impossible to plan well.

Once you’ve worked out what you expect to spend when you stop work, this should drive the rest of your plan.

The figure you should be looking for is what we call your “savings rate”. This is the percentage of your income you need to save, in order to be able to have enough money to support your post-work expenditure. The figure will be different for everyone, but the less time you have to save, the bigger it will be. There are two big reasons for this. The first is that you just don’t have all that much time to save money – and you can’t do anything about the money you haven’t saved. The other reason is that you don’t have as much time for your investments to do their work. The magic of compounding can do wonders for someone who started saving when they were 25. It’s not going to be able to do nearly as much for you, if you are starting to plan late.

It will be important to make the right choice of vehicle to help you save for retirement. Saving into a pension will be the right choice for many people, but it may not be the right choice for you. Likewise, an ISA might be right for you. And there’s a myriad of other options available too (and it may make sense to invest into more than one vehicle). At the same time, you need to work out how much risk, and what types of risk you are prepared to tolerate; you’ll also need to think about whether there are particular types of industries or activities you wouldn’t want to invest in, regardless of the potential return, and whether there are industries and activities you’d like to invest in, even if the potential returns are lower or the risks are higher.

There are no short cuts to preparing for retirement. It’s a lot of hard work, and it’s even harder if you have to play catch up. It may be that, if you start late, you have to make some compromises – perhaps accepting that you might have to work longer, perhaps part time, or accept a lower standard of living now or when you do stop work. But, if you are starting your planning late, don’t give up! That’s the one way to guarantee you will be poor when you stop work. Starting now to save now is the best first step you can take – and don’t let perfection be the enemy of good!

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
A pension is a long-term investment, and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The value of investments may go down as well as up and you may get back less than you invest. 

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