A Money Unspun guide to carefully planning your pension sooner rather than later

When you’re in your 20’s, 30’s, or even 40’s retirement can seem a long way off. That’s why many people think to themselves, “I’ll deal with it later”.

But the “put it off till later” attitude is a mistake.

There are big benefits to making pension plans as early as possible. You’re never too young to start planning for the future – even if you’re only just starting out. You’re never too old either. The important thing is to start planning now – whichever stage you’re at.

In this no-nonsense Money Unspun guide to retirement planning, we’ll explore some compelling reasons to plan early for your retirement. We’ll also give you a series of actionable steps to plan your pension in a way that leads to a comfortable retirement.

BENEFITS OF PLANNING FOR RETIREMENT EARLY
Let’s start by imagining your perfect retirement.

What does it look like? What are you doing? Spending time with family and friends? Indulging in your hobbies – gardening, reading books, travelling, cycling, arts and crafts?

Whatever your golden years look in your mind’s eye, hold on to that image. With careful planning you can make it a reality, maybe sooner than your late 60’s if you start preparing early enough.

YOU’LL BE MORE RELAXED AND SECURE WHEN RETIREMENT AGE COMES
Starting your pension plan early means a more relaxing retirement. When you’re in your late 60’s or 70’s, the last thing you want to be worrying about is finances. Ideally, you’ll have a nice nest egg to carry you through your retirement. The sooner you start working towards that goal, the better.

SAVING OVER THE LONG-TERM MEANS MORE TO SPEND WHEN YOU RETIRE
Imagine saving aggressively for 10 years, but having to stash away large chunks of your pay cheque each month.

Now imagine saving steadily over 20 or 30 years instead. You don’t need to save as much each month, and thanks to compound interest, your savings still grow nicely with a snowball effect.

Below is a quick example of the power of compounding. You can check the figures using this compound interest calculator.

Saving £1000 per month over 10 years

• Monthly contribution (PMT): £1,000
• Annual interest rate (r): 5%, which when divided by 12 gives a monthly rate of 0.05/12
• Number of years (t): 10, which translates to 120 months (n)

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We’re going to use this formula for future value:

Plugging in our numbers:

• r (monthly interest rate):05/12 ≈ 0.0041667
• n (total months): 120

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At the end of 10 years, with a monthly saving of £1,000 and an annual compound interest rate of 5%, we’ll have approximately £155,282.28.

The total amount of interest earned is ​£35,282.28

Saving £500 per month over 20 years
Using the same process, at the end of 20 years with a monthly saving of £500 and an annual compound interest rate of 5%, we’ll have approximately £205,516.83.

The total amount of interest earned is £85,516.83

Saving £300 per month over 30 years
Using the same process, at the end of 30 years with a monthly saving of £300 and an annual compound interest rate of 5%, we’ll have approximately £234,020.98.

The total amount of interest earned is £141,677.59

It’s a no-brainer – you start saving 20 years earlier, you can earn over four times more interest while only contributing a third of the amount you’d need if you started later.

SAVING IS EASIER WHEN YOU’RE YOUNGER
When you’re in your 20’s and early 30’s you have more disposable income than later on, when family, mortgages, and insurance costs are greater. Aim to make the most of those carefree years when you have less responsibilities and expenses by saving more.

If you’re older and haven’t started planning your pension yet, don’t worry. It’s better late than never and you can still build a nice financial cushion if you start in your 40’s or 50’s.

DON’T SOLELY RELY ON STATE AND EMPLOYEE PENSIONS
As it stands, UK residents can start drawing the state pension at the age of 66, but that will rise to 67 from 2028 onwards. The current state pension rate is £221.20 a week, as long as you have paid your National Insurance contributions over a long enough period.

When you factor in the rising cost of living, the state pension doesn’t give you much to live on. The UK government also recently announced scrapping the winter fuel allowance for pensioners, making it even more clear that you can’t rely on government payments during your retirement.

Employee pensions are better, but not all schemes offer generous contributions or returns. Many workplace pensions are defined contribution schemes, which means payouts are based on investment performance. Market fluctuations and inflation can leave gaps. For greater financial security, make sure you plan and build your own retirement fund in addition to state and employee pensions.

BE PREPARED FOR THE UNEXPECTED
There’s a societal trend not many people are talking about. It’s called “unretiring” and it describes retirees going back to work. The main reason? Because they need the money.

If you want to avoid unretiring, as most of us do, then you need to plan for the unexpected. Of course, you can’t plan for every eventuality, but if you prepare for the worst – such as rising expenses due to ill health or having to look after a loved one – then you’ll be in a better position than those that don’t.

HOW TO START PLANNING FOR RETIREMENT (AND POSSIBLY TAKE EARLY RETIREMENT)
In this section, we’ll outline some key steps you can take to ensure a financially secure retirement.

Step 1: Get Your Finances in Order

• Budgeting: Create a clear budget to understand your current income, expenses, and savings potential.
• Emergency Fund: If possible, build a safety net fund to cover 3-6 months of living expenses, ensuring financial stability.
• Track Your Spending: Use apps or spreadsheets to monitor where your money is going and identify areas to cut back.

Step 2: Pay Off Your Debts

• High-Interest Debt: Prioritise paying off high-interest debt, such as credit cards, as they eat into your savings.
• Mortgage and Student Loans: Create a plan for managing or reducing long-term debt, including mortgages and student loans.
• Debt Snowball vs Debt Avalanche: A debt snowball approach focuses on paying off smaller debts first for psychological wins, while debt avalanche focuses on paying off debts with the highest interest rate first. We recommend the avalanche approach, as it will free up more money to invest in savings faster. However, if clearing debts helps you to sleep better and increase your earnings, then go for the snowball option.

Step 3: Increase Your Savings

• Start Small, Think Big: Set aside as much as you can in savings, even if it’s a small amount at first. Aim to save at least 10% of your earnings each month over the longer term, if that’s achievable.
• Automate Your Savings: Set up automatic transfers into your retirement accounts each month to ensure consistent contributions.

Step 4: Consider Investing for Growth

• Stocks, Bonds, and Funds: Diversify your investments across stocks, bonds, and mutual funds to grow your retirement savings.
• Employer Contribution: Maximise employer-matched pension contributions where available.
• SIPPs and Other Personal Pensions: Look into self-invested personal pensions (SIPPs) for more control and potentially higher returns.

Step 5: Plan for Early Retirement

• Plan To Retire Early: Even if you think you won’t want to retire at 55, aim to have enough money to do it by then, as you never know how you feel when you get there.
• Savings Goal: Set a target amount for your retirement fund and work towards it over the long-term.
• Lifestyle Adjustments: Cutting down on luxury spending now could help you save more for early retirement, so weigh up the short-term and long-term benefits of each.
• Tax Considerations: Explore the tax implications of early withdrawals from pension funds and how to avoid penalties.

TALK TO AN EXPERT PENSION ADVISOR
Planning for retirement is daunting, especially when you’re trying to navigate the complexities of pensions, taxes, and various investments. That’s where an expert pension advisor with in-depth knowledge makes all the difference.

Ready to get started on your retirement plan? Contact us today.