- By Malcolm Anderson
- Published 02/20/2012
After decades spent working, retirement is supposed to be a period of our lives to relax, spend time with loved ones and explore personal interests. The last thing anyone would want is to have financial worries and struggles when they’re older. To prevent this happening, we all need to give careful thought and planning when it comes to our savings and investments.
This is especially true since we no longer live in an era when companies include excellent pension plans in their compensation packages and the government gives us a reasonable sum based on our previous income. It is now up to each individual to create a comfortable nest egg to support them when employment draws to an end.
From SIPPs retirement plans to savvy saving, the following guide will give you some insights to ensure your Golden Years are enjoyably secure and stress-free.
The Importance of a Sound Retirement Plan
Building a robust nest egg for your retirement necessitates a good savings and investment plan. To start with, it’s a good idea to calculate your net worth i.e. the total value of your assets minus the value of your debts, such as the value of your house minus the value of what you still owe on your mortgage. The goal is to have assets which exceed your debts, and there are a number of options to ensure this is the case.
Next, calculate the amount of money you will realistically be comfortable living on when you retire and consider what you’ll need to contribute each month while you’re working to help reach this figure. You’ll want your nest egg to annually deliver between 70% to 90% of your pre-tax, pre-retirement salary.
Investments are another way forward to ensure you have a good amount to live on when you’re no longer working – if you’re new to this concept, it’s wise to consult with an Independent Financial Advisor who has the experience and skill to grow your money.
Finally, you’ll need to create a budget of your recurring expenses and include your savings contributions as a monthly expense. This budget should also clearly show you where your money’s going as well as what debts should be first priority.
Get Serious About Saving
For many people, especially those in their 30’s, the concept of saving up for years just so you can make 70% to 90% of your working salary when you retire sounds mind-boggling, not least in the current economic climate when many are struggling just to cover everyday expenses.
Fortunately, compound interest and tax breaks (if you put your money in a good savings vehicle) can grow by leaps and bounds over the course of a few decades, giving your nest egg a boost. Nevertheless, saving for retirement requires discipline – it’s important to get your head around the fact that paying now will mean you can benefit later.
It’s also wise to get in the habit of reviewing your budget regularly and make savvy decisions accordingly. For example, if a large portion of your monthly income is being swallowed by credit card interest, then you need to make it a priority to aggressively pay off these debts which are bleeding you dry. One of the ironies of saving effectively is that it often entails doing some serious spending at the outset.
In addition, it’s a good idea to have an amount of your pre-tax income taken automatically off your monthly salary, since it’s easiest to save money when you don’t have it in your hands. And if you’re the type to get tempted to dip into your funds, it’s also advisable to choose a savings account that prevents you from impulsive access.
Personal Pension Plans
Government endorsed Self-Invested Personal Pension (SIPP) plans make for excellent retirement saving vehicles. Unlike other types of pension schemes, not only do you get tax rebates on your contributions in exchange for limits on accessing the funds, you will have greater choice as to the investments you place in them, plus they are securely approved by HMRC. What’s more, you can conveniently place all your existing pension schemes under a SIPPs umbrella to simplify your life.
While there are a number of Personal Pension Plans to choose from (you can learn more about PPPs in general on the Wikipedia website), SIPPs arguably carry the highest benefits. The eligibility to invest in a SIPP will depend on your individual circumstances, and all tax rules may change in the future.
The Key Investment Rule of Diversification
Financial advisors, investment bankers and economists alike will tell you that not putting all your eggs in one basket couldn’t apply more when investing for your retirement. With the stock market naturally prone to fluctuations, by diversifying your portfolio you won’t run the risk of losing all your savings if an investment suddenly takes a downturn.
From maximising your investments and pension plans under a SIPPS umbrella to maintaining a strict budget, with some savvy planning and disciplined saving practises, you will be well on your way to securing a comfortable nest egg for your Golden Years. Please remember, the value of investments can go down as well as up and you may get back less than you invested.
About the Author: Malcolm Anderson is an independent journalist writing about SIPPs