Important information - the value of investments can go down as well as up, so you may not get back the amount you originally invest.
The target of saving enough to give you the retirement you want can sometimes seem a long way away - but there’s plenty you can do to speed up your progress.
The trick with effective saving and investing is to make small changes which, on their own, may not get you to where you want to be but taken together can make a real difference.
Here’s three things that will make a big difference to your retirement saving in the long run.
1. Set your target
If you know your savings target you can build a plan to achieve it. How much do you need to have saved, and by when? If you know these things you can begin to get your finances fit for retirement and if you need to make changes you can do it earlier.
Everyone’s circumstances are different, but Fidelity research has found that UK households who manage to save seven times their annual household income by the age of 68 should be able to retire and maintain a similar standard of living as in their working life.1 This assumes that the household will include two people, both of whom are entitled to a full state pension.
While a goal of seven may sound challenging, the key is to start as early as possible and aim to meet a series of savings milestones along the way. Our analysis suggests UK households aim to have at least one times their annual income by the age of 30.2 Here’s a further breakdown by age.
Another way to set your targets is by considering how much income you think you’ll need in retirement, and then setting a savings target that will provide that income. Fidelity’s Retirement Calculator lets you enter amounts you think you’ll spend on various essential and non-essential items, like food, holidays, car running costs and entertainment.
It’s a simple tool but useful in giving you a cash estimate of the income you may need each year. You can then use our MyPlan tool to work out the savings pot you’ll need.
2. Get moving today
One of the most effective ways to boost your retirement fund is completely free - time. The sooner you start, the more time your savings have to grow.
Your savings can benefit from compounding when any profits or income generated by your funds are reinvested, rather than being paid out to you. Over time this will compound, as effectively you’re getting interest on interest, helping your savings to grow even faster.
Ideally, we would all start our pension saving the day we start earning a salary, but many will have delayed in order to prioritise other saving. The auto-enrolment scheme for pensions mean much of the UK workforce is automatically placed into a pension savings scheme by their employer but even if this includes you it may be that you need to contribute more in order to meet your long-term targets. Besides that, many self-employed people and others may not qualify to be auto-enrolled.
By setting your contributions at the right level as early as you can, you’ll give yourself more time for savings to build and avoid having to make painful sacrifices later on in order to get your saving on track.
3. Escalate your savings
Knowing how big your pot needs to be before you can retire is important but, in order to hit that target, it is vital to know how much of your earnings you need to save at much younger ages.
Fidelity’s research3 suggests that savers should be putting away at least 13% of their pre-retirement annual income before tax, each year, from the age of 25. Because everyone is different, you’ll need to work out your own target savings rate, based on the funds you think you’ll eventually need.
Auto-enrolment means that, for many of those who are in formal employment, at least 8% might be taken care of by saving into a workplace pension. But that still leaves you with a 5% shortfall to make up yourself. And don’t forget that the 13% applies to those aged 25 with many decades still to save and let returns grow - older people may need to pay in more.
If you find you need to up your savings rate, consider this simple strategy: time in increases in your contributions with increases in your salary so that they can be made gradually. If you get a 3% pay rise one year, consider keeping 2% of the raise - it’s important to feel like you’re getting richer - but channel 1% of it into your pension by upping your contribution rate.
After a few short years you will find that you are hitting your savings targets without taking the big impact of a large increase in contributions.
1,2,3 Fidelity International’s Retirement Savings Guidelines, November 2018
Investors should note that the views expressed may no longer be current and may have already been acted upon. You cannot normally access your pension savings until age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s retirement service or refer to an authorised financial adviser.