How to achieve the retirement of your dreams

Dreams of a comfortable retirement are fading fast for millions of hard-working savers, as new numbers reveal that the cost of even maintaining a frugal lifestyle rose nearly 20 percent last year.

The rising cost of living, which rose another 10.5 percent last month, is taking its toll on everyone’s budget, but especially on retirees. Maintaining a minimum standard of living after retirement now costs £12,800 – up from £10,900 last year. A comfortable pension costs £37,300 – an increase from £3,700, according to industry body the Pensions and Lifetime Savings Association.

That would pay for a lifestyle with, for example, three weeks of vacation in Europe per year, a replacement kitchen and bathroom every ten to fifteen years and a two-year-old car that is replaced every five years.

How much money do you need to achieve this?

While a comfortable pension costs £37,300, you only need to find £26,700 a year, as a full state pension – if you qualify – should cover the first £10,600.

According to calculations by asset manager Quilter, you would need a pension pot of around £645,000 to achieve this income. A couple would need a little less than double as many costs are shared. The numbers assume you own your home outright – you need a higher income if you pay rent or a mortgage.

For a minimal lifestyle you would need a pension pot of around £44,000 as most of the £12,800 would be covered by the state pension. This would allow for a week’s holiday in the UK each year, eating out about once a month and some affordable leisure activities. The budget to drive a car wouldn’t be in it.

For many people, such amounts will seem far out of reach. But there are steps you can take at any age to achieve the retirement lifestyle you want.

In your 20s

At this age, retirement is so far away that it can be tempting to save for it. However, the money you save at the beginning of your career is many times more valuable than the money you put aside later. That’s because the power of compounding means your money has longer to grow. So it’s worth making it a habit as early as possible.

Fortunately, there is a lot of help available. Unless you specifically opt out, you will automatically be enrolled in your company pension. Your employer is legally obliged to hand in at least three percent of your salary annually and you must contribute at least five percent.

Put more in if you can. The money invested in a pension is tax-free.

To calculate how much you should be saving, a general rule of thumb suggests that you should save a percentage equal to half your age when you start putting money aside. So when you’re 26, you need to save 13 percent of your salary.

However, this assumes that you continue to work hard until you reach retirement age. Chances are you’re in short supply – whether to have children, to travel, to retrain or due to illness – so save more when you can to account for times when you can’t.

You can afford to take a lot of risk with your investments as you have decades to spend them. Higher risk usually means greater long-term rewards. Investing in one or several funds that invest in hundreds or thousands of companies around the world is usually a good place to start.

Finally, keep in mind that by the time you retire, the provision for the elderly may not be as ample as it is today.

It would be nice to think that the state pension age would not be higher and the state pension as generous as it is now, but that is not a given. Plan to rely on yourself as much as possible.

In your thirties

Your expenses are likely to increase in this decade, especially if you save to get up the real estate ladder or if you have children.

It can be tempting to scale back retirement savings when things get tighter, but don’t give up if you can. It may feel selfish to save for your old age when you could be spending for your family now, but they’ll thank you for not being financially dependent on them for years to come.

If you manage to pay off a student loan, consider putting what you were spending toward retirement. Do it before you get used to the extra income.

Be sure to claim National Insurance credits if you make time to care for children or relatives. It helps you to receive a full AOW benefit later.

In his forties

This is often the decade where your earnings really increase as you move up the career ladder.

If you get a raise or bonus, try putting some into your retirement before you get used to the extra money.

If you are employed, you can consider applying for a pension increase. Not all employers will say yes, but some may agree to match a higher percentage of your retirement contributions. At this stage of your career, you probably have several pensions. Try to keep track of them all by notifying all your carriers of your new address if you move or your name if you change it.

You can track down old pensions using the government’s pension tracing service at gov.uk/find-pension-contact-details.

In his fifties

At the age of 55 (rising to 57 from 2028) you will have access to your pension pots for the first time. You may also withdraw up to 25 percent tax-free. However, it is better to leave your jars untouched unless you need them right away. This way they have longer time to grow.

Once you’ve taken money out of a pension, the maximum you can save tax-free drops from £40,000 to £4,000 a year. So if you are still accruing pension, try not to make any withdrawals.

Get a forecast of how much AOW you are likely to receive. If you’re not on track for the full amount, see if there are any missing National Insurance credits you owe. Contact the Tax and Customs Administration for verification, call 0345 300 3900.

In your 60s

It is not too late to increase your pension. You can still benefit from tax relief and employer contributions.

You may want to transfer some of your retirement savings to lower-risk funds. However, if you have some retirement savings that you hope you won’t use for years, you can keep them in higher risk funds.

If you do not have enough state pension credits for a full state pension, you may be able to buy missing years. Go to gov.uk/national-insurance-credits.

If you provide free childcare to grandchildren under the age of 12, you may also be able to claim it from National Insurance credits. You can even reverse claims by ten years if you have not filed a claim at that time.