How much should you be saving for your age?

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Money Questions is a series of articles answering our community’s concerns or queries with regards to money, personal finance and other connected topics. We love getting new questions. If you also have a money question, you can submit it here.

Question: How much should I be saving for my age?

The question of how much you need to be saving is deceptively simple to ask and uncommonly difficult to answer.

Some say that you need to have saved £1 million over the course of your lifetime to retire comfortably. Others suggest that in order to retire by 67, you’d need to have seven to ten times your final salary saved by that point; whilst other reports suggest that saving at least 15–20% of your income each year is the best rule of thumb if you’re going to have enough to live on after you stop working.

The truth is that how much you should save has as much to do with your age as your salary. Your goals and lifestyle also matter — if you want to retire early or maintain a certain standard of living you will need to be saving more.

Likewise, the popular 50/30/20 rule, laid out by Elizabeth Warren, would suggest that you reserve half of your salary for essentials like rent, bills, and groceries, just under a third for ‘fun money’ and discretionary spending, and then 20% for savings. But this might not be the right percentage for you to save.

If you’re a high earner, you might want to save much more than just 20%. If you’re on a lower salary or irregular work, you won’t want to save only to accrue more debt on credit cards or overdrafts. It’s about working out what’s right for you.

Saying that, it’s a mistake to think that you can put off things like savings and a pension until you’re older — you do want to start building up a nest egg earlier rather than later. Whatever you save now will have a chance to accrue interest over time.

As Laura Millier explained in the Telegraph, “A 23-year-old who contributes £250 to their pension a month, rising to £500 monthly by age 30 after earning a few promotions, could, with realistic 5pc returns, retire at 65 with a pension pot worth £692,000. That could pay for a 30-year retirement. Someone holding off until they are 35 to contribute £500 per month would have a pot worth much less, at £408,000.”

Similar principles can be applied to your investment strategy by thinking long-term and holding a well-diversified portfolio of funds.

One useful way to work out how much you should be saving is to consider the idea of your ‘financial finish line’. This concept comes from the Financial Times’ legendary columnist Mrs Moneypenny (AKA Heather McGregor) and refers to the idea of ‘how much money you need in your lifetime’. It offers a way for you to figure out how to know what ‘enough’ looks like and how to get there.

A financial finish line allows you to save and grow your wealth whilst also helping you take a step back from the rat race of always needing or wanting ‘more’ than what you have.

In McGregor’s example, she talks about how she wants to be debt-free, own three specific properties outright, and save an additional (and specific) sum into her pension fund, before she retired. She had worked out the exact figure and when she reached that goal, her aim was to move to ‘a plural career’ that gave her more time to do other projects and activities.

To reach that finish line, you have to decide what matters to you — what your values are and what goals you want to achieve. You then can ask yourself questions like “when do I want to retire”, “what do I need to save by that time”, “what rate of return there might be on savings” and so on. Visualising the end goal will give you a starting point from which to work backwards and also help you keep on track as you progress.

There are lots of resources out there for understanding how much you want to save and how to start. The Money Advice Service and Which have good pages dedicated to the question of saving for the future — this includes information on working out how much money you need for right now, how to build up a savings habit, and the importance of a rainy day or emergency fund.

Charities like Age UK, as well as papers like The Evening Standard and The Telegraph, also provide pension drawdown calculators that are particularly helpful if you like a visual clue for how much you need to have saved in order to maintain a certain income and lifestyle.

Keep an eye out — more questions and answers coming each week! In the meantime, submit your question here and we’ll make sure to respond.

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