How much should I have in my pension pots at 30?
Are you wondering how much money you should have in your pension pots at the age of 30? This guide covers everything you need to know about planning your retirement savings in your 20s and reviewing your retirement savings pot when you reach 30.
Introduction.
When you're in your 20s, retirement might seem like a lifetime away. However, planning for retirement is an essential part of managing your finances and the earlier you start, the better. If you're wondering how much you should have in your pension pots at 30, you're not alone. It's a question that many people ask themselves, and as everyone starts from a different financial base, with different approaches to spending and saving, combined with a wide range of salaries, the answer will vary depending on your circumstances. However, in this guide, we'll look at how much you should aim to save in your pension pot by age 30 along with some tips on future retirement planning.
Why Retirement Planning is Important.
Before we get into the detail of discussing how much you should have saved into your pension by age 30, it’s important to understand why active retirement planning from an early age is so important. Clearly, retirement planning might not seem like a priority when you're in your 20s and 30s, but it's essential to plan for your future. Here are some reasons why retirement planning is crucial:
You'll have more time to save: The earlier you start saving for retirement, the more time you have to build up your pension pot. Even small contributions can grow over time with the power of compound interest.
You can enjoy your retirement: Retirement should be a time to enjoy the fruits of your labour. Without proper retirement planning, you may have to keep working long after retirement age to make ends meet.
You'll have financial security: A pension pot provides financial security in retirement, and it's essential to have enough money to cover your living expenses.
What factors are important to consider when determining how much someone should have in their pension by age 30?
A great first step to determining what your pension savings should be at 30 is to start by finding out how much you have built up to date. Most pensions have an online platform that you can log into to get an up-to-date valuation or you may have received an annual statement in the post. Note that you may have several different pension pots if you have changed employers a few times and you may also have your own SIPP that you have contributed to outside of work.
All you need to do is dig out all the figures from your various pots and add them together for a total pension savings pot value.
If you haven’t made a savings goal yet or have just been passively paying into your pension, this figure may seem like a lot or may seem like very little. How do you know if this is a good start or if you are not setting enough aside?
To frame your current pension savings position, your next step is to consider the following questions:
What is your earning potential now and in the future?
Your current income will play a significant role in determining how much you will have in your pension by age 30. In terms of your retirement, as a general principle, the more you earn over the course of your working life, the more income you will likely need in retirement and therefore the more you will need to put away during your working life to support a similar lifestyle in retirement.
What are 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 30. This includes both essential expenses (e.g. housing, food, utilities, etc.) and discretionary expenses (e.g. entertainment, travel, etc.). If you are on a lower salary, it’s unlikely that you will have had much spare income to have built a substantial nest egg by the time you are 30. On the flip side, if you have been a high earner, but still haven’t accrued much in the way of pension savings by 30, you may have to reprioritise your monthly spending and budgets.
Where do you live now and where do you plan to live in the future?
Most people can’t live at home forever and many don’t wish to stay in rented accommodation for long. With this in mind, you may wish to prioritise saving for a house deposit in your 20s. However, you must bear in mind that it’s good practice to balance this with retirement and pension savings, particularly where your employer is matching your pension contributions (remember that you need to make the most of compound interest).
What are your retirement goals?
As mentioned earlier, 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. If you want to retire early, you will need to save a large proportion of your income from the outset.
How will your investments perform?
Although you are unlikely to have been invested for long enough to take much advantage of compound interest, the performance of your pension investments to date will still be a key factor in the size of your pension pot at 30. When investing, it is important to consider the level of risk you are comfortable with, as well as the historical performance of your chosen investment vehicles (albeit past performance is not a guide to the future). It may be the case that you are willing to take more risk when you are young to potentially maximise your returns; a financial adviser will be able to guide you in this respect.
What other savings do you have?
Finally, it is important to consider any other retirement savings pots 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! It’s important to remember that not all your retirement savings have to be in a pension.
How Much Do I Need in My Pension Pot at 30?
Now you have an idea of how much you have saved to date for your retirement, it’s useful to introduce some guideline figures. So, how much money should you aim to have saved in your pension pots by the age of 30?
Remember that there is no one-size-fits-all answer to this question, as it depends on your lifestyle and retirement goals. However, a commonly used rule of thumb is that you should aim to have saved the equivalent of your annual salary in your pension pots by the time you're 30. For example, if you earn £30,000 a year, you should aim to have at least £30,000 in your pension pot by the age of 30. If you earn £60,000 at age 30, you should have approximately £60,000 saved for retirement.
How do your figures look compared to this? Do you have more or less than your gross annual salary set aside for retirement?
Clearly, this is very much a blunt instrument, so for a more detailed approach to working out how much you should have saved into your pension by the time you are 30 you will need to first understand what your income requirements in retirement will be and then work out the capital required to generate that income. It is then possible to backdate your target to see where you should be at age 30.
How much income will I need in retirement?
If you have read our previous article that answers the question of how much do I need in my pension pots to retire, you will know that, according to the Pensions and Lifetime Savings Association (PLSA), the vast majority of single people outside of London will need a pension drawdown income of at least £23,000 each year for a moderately comfortable retirement (£34,000 for couples). This figure rises to £37,000 a year for a comfortable retirement (£54,000 for couples), however, you may have your own goal for an income, which could be £60,000, £80,000, £100,000 or more.
You can check the latest income requirement estimates on the PLSA website.
As you may remember from our article, 4% is typically considered a reasonable rate of withdrawal from a pension pot that balances both the need for income and the preservation of capital (note that the headline gross return of your investments may well be higher, however, we have to take account of inflation and coverage of investment charges/fees). In this case, £23,000 is 4% of £575,000 and therefore this is a good pension pot size to target for many single people. But do bear in mind, that even taking a withdrawal of 4% could result in you running out of money in your lifetime, for example, if investment returns are particularly poor over a long period.
The table below illustrates how much capital is required to generate the income you may need in retirement (at a 4% withdrawal rate). These are of course just basic figures that don’t include any allowance for taxation, high levels of inflation etc. However, they do offer a good indication of just how much you need to save for your retirement to ensure that you can balance income with capital preservation (should you wish to be able to fund long-term care for yourself and/or your spouse and pass on your wealth to the next generation). Don’t forget that as a couple, you can split your retirement savings between you and you can also build funds in tax-free ISAs, which will have an impact on your net income and tax bill.
Equally, it’s important to remember that you may build up an entitlement to a state pension over the course of your career, so you may or may not wish to factor this into your calculations. You can check how much the new state pension is on the Government website.
|
Income Req |
Pension Pot Req |
|
£23,000 |
£575,000 |
|
£34,000 |
£850,000 |
|
£37,000 |
£925,000 |
|
£54,000 |
£1,350,000 |
|
£60,000 |
£1,500,000 |
|
£80,000 |
£2,000,000 |
|
£100,000 |
£2,500,000 |
How much money do I need in my pension pot to retire?
How can I work out how much money I need in my pension and retirement savings?
With all the above in mind, only you can decide what your target annual income is, whether you are a couple or an individual. As previously mentioned, we use a withdrawal rate of 4% as a very rough guide, so all you need to do is take your desired annual income, divide it by 4 and then multiply that figure by 100 to work out how much money you need in your retirement savings and pension pot.
((Annual Income Target / 4) * 100) = Pension Pot Value Target
As an example, if your income needs in retirement are £40,000, you can divide this by 4 to get £10,000 and then multiply it by 100 to arrive at a Pension Pot Value target of £250,000.
The takeaway from this exercise should be just how much we all need in pension savings pots to provide us with a decent level of income when we retire. Bear in mind though that by age 30, you have decades to prepare for your retirement by making your existing savings work for you and to continue to contribute to them for the rest of your career.
Making your existing retirement savings work for you.
You may want to look up compound interest and the ‘Rule of 72’ if you are not familiar with how compound interest works. Essentially, a sum of money will double due to interest being paid on interest, over a period of time. The period of time is roughly determined when the number 72 is divided by the interest rate. For example, if you could get an interest rate of 8%, your money would double in 9 years (72/8). If the interest rate was 5%, your money would double in 14.4 years and so on.
The main questions at age 30 are: How long do you want to continue working until you retire? And what interest rate can you achieve on your investments?
The table below shows roughly what your current retirement savings could be worth in 9 years if you were able to achieve an interest rate of 8% - without adding any more money. And, if they double every 9 years, you will quickly see how even a small pension pot by age 30, could be worth a lot after several decades. Remember though that these are just rough figures and don’t take into account inflation etc.
|
Savings at 30 |
Int. Rate |
Yrs. to 2x |
Value at 39 |
|
£5,000 |
8% |
9 |
£10,000 |
|
£10,000 |
8% |
9 |
£20,000 |
|
£20,000 |
8% |
9 |
£40,000 |
|
£30,000 |
8% |
9 |
£60,000 |
|
£40,000 |
8% |
9 |
£80,000 |
|
£50,000 |
8% |
9 |
£100,000 |
|
£60,000 |
8% |
9 |
£120,000 |
How much will my pensions be worth in 9 years at 8% interest, compounded?
Your main consideration at age 30 should be how much you can save each month into your retirement savings pot to bolster it and hit your savings goal. This can be via your employee pension contributions with added tax relief, extra employer contributions, your own personal SIPP contributions (again with the possibility of tax relief) and ISA savings that use taxed money now to provide tax-free savings and investment returns in the future. So let’s look at this in more detail.
How much do I need to invest into my pension each month to retire?
As explained above, this should be the crux of any pension review you are undertaking at age 30. If 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 can use 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:
Are aged 30.
Have approximately £30,000 already saved into your retirement and pension savings pots.
Want to retire at 67 (so have 37 years left to save).
Need an income in retirement of £54,000 (so, your pension pot saving target should be in the region of £1,350,000).
Expect an investment return of 7%.
You will need to invest something in the region of £455 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.
A basic pensions savings target illustration. £30k to £1.35m over 37 years, plus £455 PCM compounded at 7%.
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 circumstances and goals. This plan would be regularly reviewed and adjusted as needed to help you stay on track to meet your retirement goals.
Conclusion.
In conclusion, retirement planning is essential, and the earlier you start, the better. By the time you're 30, you should aim to have the equivalent of your annual salary saved in your pension pot. 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 when you are younger, 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 to discuss ways you can maximise your retirement savings and income in retirement.
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 can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Wells, we advise clients across the UK.
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 circumstances.