Since life can be full of financial goals such as saving to buy a new house or putting money aside for your children’s education, it can be all too easy to forget about preparing for the golden years where you aren’t working any more. This is a crucial life goal though, so it will pay (literally) to think about your retirement in the right manner. Here are three of the most common mistakes to avoid so that you can then gain the finances you need once you get older.
Don’t Put Off Planning
Since retirement is several decades away, there is always the temptation to focus on other things first. Buying a new car, saving up for a wedding, or going on holiday are just a few of the many ways in which life demands your money here and now. Even if you put a few thousand Pounds towards your retirement each year though, you’ll eventually build up a sizeable amount through compound interest. Here’s a glimpse of what you’ll gain at 65if you start saving at:
- 20 years old: £319,000
- 30 years old: £180,000
- 40 years old: £95,000
The above calculations assume you pay £2,000 a year and that the value increases by 5%. It also assumes you reinvest all of your savings and never take anything out.
As you can see, there is a sizeable difference between starting at 20 and starting at 40. The additional payments and the extra compound interest both have a massive effect on how much you eventually gain once you retire.
Don’t Underestimate How Much You’ll Need
Of course, you’ll need a target when figuring out how much you’ll actually need per year once you stop working. This is another area where most people fail, as they typically calculate a number that is too low for their future financial requirements. This is because the general rule of thumb (that you’ll need 70 – 80% of your current earnings to survive) doesn’t take into account several important factors. Whether using an annuity calculator to figure out which option is best or talking to a consultant who specialises in retirement planning, you will need to think about the following important, yet often overlooked aspects of elderly living:
- How long do you think you’ll live after retiring?
- Will you still have mortgage payments to make?
- Should you add extra money for medical bills?
- Are you thinking of travelling once you stop work?
You’ll also need to think about how much the cost of living will increase between now and your retirement. Look at the best and worst case scenarios for inflation rates (which can be between 2 and 4%) and calculate any increased expenses that you may have to pay in the future.
Don’t Ignore Tax Beneficial Plans
The government also offers tax incentives for those who put money towards their retirements. In the UK, this is provided in the form of an Individual Savings Account (ISA) as well as pension plans. Both of these can be used together to reduce the tax you pay now. This means that, instead of giving money to the government, you can instead put it towards your happiness and wellbeing in the future.
By ignoring these kinds of plans, you’ll effectively be throwing your money away. However, to get the best combination of ISA’s and pension plans, you’ll need to do your research or talk to a retirement consultant. This added information and advice will help you to find out exactly what you need to when it comes to putting money towards your retirement in an effective, simple manner.