Think you’ll never retire? Here are four things young people can do to prepare
- Written by Chris Parry, Principal Lecturer in Finance, Cardiff Metropolitan University
Retirement planning sounds about as exciting as watching paint dry, especially when you’re in your 20s. But it’s actually the key to unlocking your future freedom. The earlier you start saving, the more time your money will have to grow. And you need to have a plan for how much you need to save and how you’re going to do it.
Unfortunately, retirement planning is often something that’s overlooked, even by people in their late 40s. And even if they want to start planning, they may find the idea of it overwhelming or be unsure where to start.
Here’s how you can start planning your retirement and take charge of your financial future.
1. Calculate your outgoings
You are likely to have less money to live on in retirement than as a working person. This is why it’s important to have a rough estimate of how much you will need in the future. Preparing a budget is one way to do that. Try to keep the age at which you wish to retire in the back of your mind.
You can break your future spending down into two main categories – essential and non-essential.
Essential expenditure covers the unavoidable costs of living. It includes things such as rent or mortgage costs, utilities, groceries and transport, for example. It can also include debts, like loans and credit card debts, although it’s best to try to clear this type of expenditure before you retire.
Non-essential expenditure covers lifestyle costs such as dining out, holidays and hobbies.
You can use a spreadsheet to work out all these costs and there are various retirement budget planners available online to help you too.
2. Calculate your pension income
You now need to estimate how much money you will have coming in.
The first step is to check how much of a state pension you are likely to get in future. This estimate, based on your national insurance contributions, provides an idea of the financial support you can expect. The UK government website[1] helps work the figures out for you.
The next step is to consider your income from any private pensions you may have, which come in two main types – defined contribution pensions and defined benefit pensions.
Defined contribution pensions, also called “money purchase” pensions, are usually either personal or stakeholder pensions. So, they can be private pensions which you’ve arranged yourself or workplace pensions arranged by your employer.
If you are over 22, under state pension age and earning more than £10,000 per year your employer must automatically enrol you in a workplace pension scheme. This means that you will pay a certain amount yourself and your employer can make additional payments on top.
References
- ^ website (www.gov.uk)
- ^ Rido/Shutterstock (www.shutterstock.com)
- ^ This article is part of Quarter Life (theconversation.com)
- ^ Future graduates will pay more in student loan repayments – and the poorest will be worst affected (theconversation.com)
- ^ A beginner’s guide to the taxes you’ll hear about this election season (theconversation.com)
- ^ If you have money anxiety, knowing your financial attachment style can help (theconversation.com)
- ^ Will Britons work until they're 71? Expert examines proposed pension age rise (theconversation.com)
- ^ pension-tracing service (www.gov.uk)
- ^ life expectancy (www.ons.gov.uk)
- ^ financial advice (www.moneyhelper.org.uk)
- ^ official register (register.fca.org.uk)
