Pensions and RetirementPersonal Finance
Written By Helen Carey
Turning 40 is a milestone in everyone’s life. It’s a time for reflection on where you are, the things you have done and the things you still want to do. From a financial perspective, you will likely have found your financial feet in the world in terms of earning power and spending patterns. The question is though, how much should you have in your pension savings pots by age 40?
We all have different experiences with money.
It’s important to start by saying that everyone is born with an equal knowledge of money – zero. However, even within the first hours of your life, the situation you were born into will start framing your attitude towards money.
The ways that your parents, family friends and peers earned, spent and saved their money will have affected you by osmosis throughout your childhood. If you think back to your school days and beyond, some of your peers may have had cars bought for them, some will have had Saturday jobs, some will have had an all-expenses paid stint at university whilst others will have had to pay their own way or will have decided to go straight into work instead.
As you grew a little older, some of your peers may have had high-flying careers with earnings to match, whilst others may have struggled to make ends meet. Some people may continuously struggle with debt, others will spend everything they have in order to look successful and others may have an enviable surplus of cash.
On the housing front, some of your peers may still be renting at age 40, whilst others may have got a foothold on the property ladder a couple of decades ago.
As you can see, life is complicated and everyone has had a different experience and will have different attitudes towards savings. Interestingly though, when it comes to your pension, the earlier you started saving, the less you have had to contribute to building a reasonable pension pot thanks to the magic of compound interest.
Nonetheless, as with most financial matters, it is fruitless to compare yourself against your peers. We have all made different decisions over time, learned from our mistakes (or not) and all have different levels of financial understanding and attitudes towards savings. What is important is that just by reading this article you are taking steps to plan for your future, it’s what you do from now on that will make all the difference.
Ok, but how much should I have in my pension by age 40?
With the above out of the way, you are probably looking for a more detailed answer, rather than a “how long is a piece of string” approach.
From a financial advice perspective, it is impossible to give an exact amount that someone should have in their pension pots by age 40, as it can vary greatly depending on an individual’s circ*mstances such as income, lifestyle, retirement goals and attitude towards investment risk.
However, as a general rule of thumb, it suggested that individuals aim to have a pension pot that is the equivalent of around 1.5 times their annual salary by age 40. As such, someone earning £40,000 per year may want to aim for a pension pot of around £60,000 by the time they turn 40.
| Annual Salary | Guideline Pension Target at 40 |
| £25,000 | £37,500 |
| £30,000 | £45,000 |
| £40,000 | £60,000 |
| £50,000 | £75,000 |
| £60,000 | £90,000 |
| £70,000 | £105,000 |
| £80,000 | £120,000 |
| £100,000 | £150,000 |
| £125,000 | £187,500 |
| £150,000 | £225,000 |
| £200,000 | £300,000 |
| £300,000 | £450,000 |
Of course, this is only a rough estimate, and it is important to consider individual factors such as your own retirement goals, household expenses, and investment performance when determining a pension savings target (more on this later).
It may be the case that you started slowly in your career and earn a significant sum today or perhaps you have always earned above average, but never gave much thought to your retirement. It’s these factors that a financial adviser would work closely with a client to assess their unique situation and develop a personalised retirement savings plan that takes these factors into account.
Don’t forget either that it is often the case that the more you have saved, you more likely you are to dedicate a portion of it to higher-risk opportunities (and the possibility of greater returns). Whereas those that have struggled tooth and nail to save into a pension fund are less inclined to take risks, although this will depend on the individual. It's important to reiterate that comparison against your peers isn’t necessarily healthy and that you need to focus on setting your own targets and savings goals. Early action can pay huge dividends in the long run.
What factors are important to consider when determining how much someone should have in their pension by age 40?
A great first step to determining what your pension savings should be at 40 is finding out how much you have to date. To help put your pension savings targets into context, it is really helpful to consider the following:
Your income: As mentioned earlier, your current income will play a significant role in determining how much you should aim to have in your pension by age 40. As a general rule of thumb, a pension pot equivalent to 1.5 times your annual salary is a good starting point however anything from 1-2 is considered a good going.
Your retirement goals: It is important to consider your own personal retirement goals, such as the age at which you want to retire, the lifestyle you would like to have in retirement, and any specific financial goals you would like to achieve (such as paying off a mortgage, travelling and the like). This will help to determine how much you will need to save in order to achieve these goals.
Your expenses: Your current and future expenses should also be taken into account when determining how much you should have in your pension by age 40. This includes both essential expenses (e.g. housing, food, utilities, etc.) and discretionary expenses (e.g. entertainment, travel, etc.).
The performance of your investments: The performance of your pension investments will also be a key factor in determining the size of your pension pot at 40. It is important to consider the level of risk you are comfortable with, as well as the historical performance of your chosen investment vehicles.
Other retirement savings you may have: Finally, it is important to consider any other retirement savings you may have, such as additional pensions, individual savings accounts (ISAs) or any other investments. These can all contribute to the overall size of your retirement savings, provided that is what they are earmarked for!
How much do you need in pension savings pots to retire?
Understanding how much you should have in pension savings today is an important step in planning your retirement, however, the figure is more or less academic unless you know how much income you will need when you retire. Essentially, the more expensive your lifestyle is, the more money you will need in retirement. What’s useful though is that you can actually put a figure on it.
We’ve writtena dedicated article on how much you need in your pension fund to retire, which is definitely worth reading as there is some great information in there to help you set your own pension savings targets.
To cut to the chase though, 4% is typically considered a reasonable rate of withdrawal from a pension pot that balances the need for income with the preservation of capital. So if you want £50,000 a year in retirement, you will need to build a pension fund of £1,250,000. The sum to work out your pension savings target is:
(Annual income required / 4) * 100
So, if you want £30,000 a year in retirement, you will need a pension fund of £750,000. If you want £100,000 of income in retirement, you will need to set a pension savings target of £2,500,000.
How much do I need to invest in my pension each month to retire?
This should be the crux of any pension review. You know how much you already have and how much you are going to need in retirement; the final piece of the puzzle is to establish a pension savings plan to meet your target.
To give yourself a quick estimate of how much you need to save each month, you canuse a simple online compound interest calculator. The variables you need to consider are how much you already have, how many years you want to continue working, how much you can save each month, what the investment returns are (7% is a reasonable place to start) and, of course, what your target is.
As an example, if you:
Currently earn £60,000.
Have met the guideline pension savings target of £90,000.
Want to retire at 65 (so have 25 years left to save).
Need an income in retirement of £55,000 (so, your pension pot saving target should be in the region of £1,375,000).
Expect an investment return of 7%.
You will need toinvest something in the region of £1,060 every month until retirement. This is of course only a very basic calculation as you will also need to consider inflation, investment charges, platform charges and much more.
If you want to get more detailed, you can use our UK Pension Pot Calculator. Again, it’s important to stress that a financial adviser would work closely with you to assess these factors and develop a pension savings target and a comprehensive plan that takes into account your unique circ*mstances and goals. This plan would be regularly reviewed and adjusted as needed to help you stay on track to meet your retirement goals.
Conclusion.
What clients often find staggering is just how much money is required to enjoy a comfortable retirement. It is also important to remember that compound interest works like magic, so if you can front-load the amount you save for the next decade, the investment gains could be significantly higher in the long run than if you make large contributions just before you retire.
Overall, the guidance is to save as much as you can, save regularly, save as early as possible, set an ambitious target and work with a financial adviser to regularly review your position. You can even arrange a free initial consultation with one of our highly qualified and experienced advisers.
What’s next?
If you want to bring yourself up to speed on the topic of pensions, a great place to start is this index of pension articles we’ve published on the subject. If you need help or advice on your personal or business finances or if you want to consider investing to make your money work harder, you canget in touch with one of our advisorsfor independent financial advice. We offera free initial consultationand although we are based in Tunbridge Wells, we advise clients across the UK.
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Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circ*mstances.
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Helen Carey
