People in their 40s are in a “sweet spot” when it comes to thinking about retirement, according to Claire Trott, head of advice at St James’s Place.
At this age, savers should be able to think of retirement as something that is achievable, compared to a very distant problem, which is the case earlier in life.
Of course, it can be easy to start panicking about the future at this age, given that retirement begins to feel closer at hand while pension pots are likely to still be far below the recommended amount for a comfortable post-work life.
Recent PLSA figures concluded that a couple would need a retirement pot of around £460,000 to live comfortably, but this number will swell with time.
Assuming 2% inflation per year (the Bank of England’s target), a 40-year-old couple would need £769,772 to retire comfortably in 2051, an increase of almost £300,000.
While this may cause savers to question if they can still achieve a comfortable retirement, particularly if they are already falling behind on their goals, Trott was unconcerned.
“I think the average saver needs to target what their retirement looks like in today’s terms. Inflation will be what it will be,” she said.
Savers putting away money in their 40s can still rely on compound interest to grow the value of their pension pot, she explained. “In today’s terms”, savers can reach a retirement pot of £800,000 by investing around £300,000-£500,000 and letting compound growth do the rest of the heavy lifting.
They still have a long time to invest, she noted, so there are two options. One is to take more risk.
Trott said: “20 years is still a long time for an investment horizon. If you’re comfortable taking some extra risks to catch up on your pension, it can be a great bonus to do so.”
De-risking portfolios should be saved for people’s 50s and 60s because if people put it all in cash too early “there’s no chance you're going to make more than inflation”.
The other is to save more. Here, she noted that 40-year-old savers may be more financially mature at this age bracket, progressing through the ranks and enjoying substantial pay rises, which can be a great way to get back on track if they find themselves behind.
A good rule of thumb for a 40-year-old is that “at least half of any pay rise” at this age should be put towards retirement, Trott argued.
“It’s money you didn’t already have and probably don’t need all of, because you were already living in a good position without it,” meaning savers can use it as a way of supplementing their retirement fund.
But not everyone will feel behind. For example, the average saver is unlikely to be starting their savings from scratch, Trott explained. Auto-enrolment means most people in this age group should have contributed to a pension over their lifetime, particularly as they are likely to have switched jobs multiple times before settling on their current career. This should give them solid grounding for a comfortable retirement in the future.
But it is also important for savers to remember that a comfortable retirement is not entirely dependent on their pension.
When a saver reaches the age of 40 they should begin considering how all their assets might be able to contribute to retirement, particularly if they feel they are falling behind.
While a pension is the most tax-efficient way of preparing for retirement, it is also the “most restrictive” because it cannot be accessed until a certain age. The average 40-year-old saver is likely to have several different investment wrappers beyond their pensions, such as individual savings accounts (ISAs), emergency funds, or even their home, that can help contribute to their retirement later in life.
“Achieving a comfortable retirement is not always about what’s in your pension,” Trott explained.
Other options that may apply to some include spending less on holidays or nicer cars – money that could easily be redistributed to a pension or other savings account.
Then there is property. While some will have young children, those who started their families early may be in a position to downsize, freeing up additional money that can be set aside for retirement.
“At the end of the day, having all these different options to facilitate your life now is still planning for your retirement, just not with pensions. It’s not just about putting a little in often, it’s about putting it in a variety of places as well,” Trott said.
Perhaps reassuringly, she said a 40-year-old saver has the flexibility to think about their retirement in different ways, and can often be better positioned for retirement than they initially think.