Be frugal at 40 and prioritize your retirement

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For millennials, 2021 is a milestone: the year the generation born between 1981 and 1996 begins to turn 40.

It’s often a ‘wake-up’ time in terms of personal finances, when people take a step back and seriously consider retirement, realizing that the next 20 years can go by as quickly as their children have gone through school years. primary.

For those who are tempted to grab the nettle, now is not a bad time to take this assessment: this week marked Retirement Awareness Day 2021 (maybe next year it should switch to Week retirement awareness campaign, as it actually takes place over five days) to raise awareness of the importance of saving for retirement.

Now in its eighth year, the campaign has useful resources to daysensitivitypension.com, is backed by Pensions Minister Guy Opperman – at 56 old enough to collect his private pension – and has the celebrity backing of TV presenter Steph McGovern, representing millennials.

This is also the year that the winner for Best Picture at the Oscars – Nomadic country – depicts the harsh realities of not having a nest egg for years to come – perhaps the biggest “retirement awareness” media event of all time. Few would want to spend their 60s living in a van and struggling to find work as a seasonal worker.

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Most millennials will neither fit the stereotype of the avocado toast and latte spender, nor the frugal advocate of FIRE (financial independence, early retirement). But millennials have had to wait longer than their parents to reach standard financial milestones, with home buying coming later (in their mid-30s) and often after having children. So, for many, pensions have not yet been a priority.

Is it too late to sort out retirement planning at 40? No, there are always steps you can take. And the first is what you are going to need to save.

According to the Pension and Lifetime Savings Association, a single retired person will need £ 10,200 per year at current prices to achieve a minimum standard of living; £ 20,200 per year for a moderate level; and £ 33,000 a year for a comfortable one.

With the state full pension paying £ 9,339 a year, you might think there is nothing to worry about. But you will have to wait until 68 to get it and to be eligible you will need 35 years of national insurance contributions, so check your records on gov.uk.

Note that UK state pension arrangements have been rated among the worst in the developed world by the OECD and there is no personal NIC fund for you – state pensions are paid on current taxation, so there is no guarantee.

Last week, Prime Minister Boris Johnson announced a 1.25 percentage point increase in the national insurance and dividend tax, described as a “health and social care levy”, while suspending the triple foreclosure of state pension increases. The pressure on public funding is not going to go away, so it is best to achieve this minimum standard of living in retirement on your own, if you can.

Most people invest for retirement by combining the proven tax envelopes of retirement and individual savings accounts (via stocks and Isas stocks rather than the cash versions). Money held inside these is immune from income and capital gains taxes, and therefore unaffected by last week’s levy and potential future raids.

Plus, saving in a pension gives you free money in the form of an initial income tax deduction on contributions, which is extremely valuable in the context of rising taxes. The more you invest in a pension, the less tax you pay.

For a 40-year-old, the age at which you can withdraw money from a private pension has increased to 58, as it is now always 10 years before the state pension is paid. So if you need some of the money before the age of 58, you will need to invest in an Isa that allows withdrawals at any time.

But having an Isa or a pension plan is only half the story. How it works depends on the investment choices and fees you pay, as well as your contribution levels.

Young workers (you are always one of them) often don’t realize the benefits of taking on more investment risk in exchange for the prospect of higher returns. High risk in this context doesn’t mean crypto trading – it just means a higher proportion of stocks.

A study conducted by Opinium on behalf of Interactive Investor found that four in 10 people under 40 (39%) think the most appropriate level of risk for their pension is’ medium ‘, with 28% saying that’ low risk ”is most appropriate. Only 20 percent of workers under 40 believed a higher risk pension was the most appropriate level for their age.

Dan Mikulskis, chief investment officer and partner at retirement consultancy LCP, says: “There is no free lunch. Higher yielding portfolios also carry more risk, but young investors can often afford to take this risk, a fact that can often go unnoticed.

Over the decades, the difference becomes very important, he adds. By investing all of their money in stocks, an average employee would expect to have £ 46,000 more in retirement compared to a moderate risk balanced fund, by his calculations. This is equivalent to increasing lifetime contributions by 8 to 12 percent, or working a decade more.

“Every percentage point counts,” says Mikulskis. “People should think like an investor, making sure they look under the hood to see how their funds are being invested and also that the way their pension is invested is right for them.”

Small differences in charges can turn into thousands of pounds over the next 15-25 years, so consider reducing them. The average rate for an automatically affiliated pension plan is 0.48 percent. while many old-fashioned pensions have charges of 1 percent or more. You could reduce them by changing your fund option or switching to a cheaper pension.

Popular funds among Millennial Investors on Interactive Investor include Vanguard LifeStrategy 100% Equity and 80% Equity, which have low ongoing charges of 0.22 percent and have generated strong returns (I own them too).

If you start a pension from zero to 40, the rule of thumb is to set aside 20 percent of your income.

But if you want to earn £ 10,000 income within 55 years, perhaps to free yourself up for a career change, retraining, or starting a new business, you’ll either need a pot of £ 130,000 (if you just want to fill the state retirement age) and £ 300,000 (to earn 3.5 percent income).

With 8% annual growth (very optimistic), you could achieve this in an Isa by paying between £ 450 and £ 1,000 per month, which is well below the £ 20,000 annual limit for Isa contributions. With 5% growth, £ 550 to £ 1,500 per month would achieve this.

This level of savings may seem extreme, but it’s what many millennials have paid in monthly child care fees. It’s time to make your retirement savings your new “baby” and take care of them.

Moira O’Neill is Head of Personal Finance at Interactive Investor


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