Retirement Planning: How To Start Saving For A Pension
When it comes to retirement planning, the most popular opinion is that you must start saving money as soon as you start earning. However, the reality may not always allow doing this. Student debts, credit card debts, dreams about a new home and other necessities and temptations force us to postpone our retirement planning. Even though we may find numerous reasons to listen to the voice that wants us to start saving later, we need to take all our efforts to hush that voice and make a decision that we will very much appreciate in the future. If you’re ready to start saving but don’t know how to do it, answering these four questions will help you to develop a solid retirement plan.
- How should I start saving and prioritize my savings? Before you start putting money into a pension, you need to consider your financial position. In case you have short-term debts like credit card loans or other personal loans, you need to pay them off first regardless of your age. It’s important to do this because usually short-time loans charge a lot in interest, which will definitely decrease your saving potential. Also, it is highly advisable to have money (equivalent of 2 or 3 month salary) in a bank account in case of emergency. No matter what mid-term priorities an individual may be chasing (educating children, buying a new home), it’s crucial to understand that one’s retirement needs should be taken care of first.
- When should I start saving money? The rule ‘the earlier the better’ applies to all those who are financially stable. Because the earlier you start saving, the more money you will be able to generate in the long run. The effect of compound interest works strongest after 25-30 years of savings. It means that after 25 years of saving money, your capital will increase in geometrical progression. Think when you want to start using your retirement capital and calculate how much you need to put away in order to reach your goal.
- Why can't I use the state pension? There are two reasons why you shouldn’t anticipate the state to guarantee you a sheltered retirement. The first reason is that because of the increase of life expectancy, workers will work longer before they can expect a state pension. On the other hand, the amount of state pension is lower than £700 per month, which is definitely much less than you need to live a good life.
- What’s an automatic enrolment system? It’s the system, which was introduced in 2012 in the UK and means that employees start saving money for pension automatically if they’re:
- at least 22 years old;
- not pensioners yet;
- earn more than £10,000 a year;
- work in the UK according to their contract.
Automatic enrolment system supposes that you don’t have to do anything special to open a pension as employers will make all the arrangements. However, an employee may choose not to participate in this system if he or she has debts or for other personal reasons.
Start saving early and enjoy your retirement!