Top Tips For Budgeting For Retirement

By Maike Currie, author and investment director at Fidelity International

Research from Fidelity International shows if women contributed an additional 1% of their salaries towards their pensions – that’s just £35 a month over 39 years – the gender savings gap will finally close. Budgeting for retirement as soon as you can really makes sense. Initiatives like Good Money Week give necessary exposure to a long-standing financial crisis, in particular for women, but the conversation doesn’t stop here and more is needed to inspire women to get invested and start really budgeting for retirement.

Whether you’re in part time employment, not currently working or are enjoying an early retirement, it’s imperative adequate provision is being put aside for later life. For women it is even more crucial to plan as early as possible given longer life expectancies and the increased likelihood of taking career breaks to take care of children or elderly family members.

What do you need to consider when budgeting for retirement?

1. Cover essential expenses with secure income

Don’t underestimate your essential expenses. Start with what you actually spend now rather than trying to do a bottom-up budget estimating bills.

Sources of secure income include state pension, company final salary pensions and annuities. You can increase your state pension by deferring taking it. For people reaching state pension age before 6 April 2016 this is a particularly attractive option. If you have a final salary pension then you may be tempted to cash it in for what sounds like a large investment fund but beware, this is rarely the right course of action. Having secure income is gold dust in avoiding running out of money.

2.  Invest in growth assets to combat inflation

Inflation is the silent assassin. Retirement could last over 30 years and just consider how prices have risen recently.

Insuring against inflation is expensive. Buying an annuity at the age of 65 which increases in line with inflation pays 40% less than an annuity that does not increase. A diversified portfolio of stocks, property and bonds can provide growth, but you will need to watch your investments carefully. If markets fall, then be prepared to draw less income for a short period.

3. Plan for the unexpected

Rainy-day funds are helpful particularly when met with life’s unexpected events such as falling ill, needing extra care in your old age or having a sudden expense like a major house repair. It is good to have secure income, but you do need to keep some capital available should you need it. The solution is likely to be a mix of investments, cash and annuities but the right mix will vary from person to person.

Spend money safely in retirement but remember you only live once. Don’t deny yourself the chance to do things because you are frightened to spend money.

Related: What Not To Do With Your Pension Pot

4. Never too late

You’ve probably got debts to pay off, you may have plans to embark on an expensive holiday or to commit to big renovations to your property, and that’s on top of the bills and all the other costs of life. And let’s not forget an active social life to fund – which admittedly doesn’t come cheap. So, it’s easy to see why saving for your retirement seems impossible.

During times when you’re in employment, signing up to a workplace pension scheme is a no-brainer. Grab it with both hands, because that’s money you’re getting on top of your salary. While you can’t get your hands on it until you’re at least 55, by then it should have grown into a nice pot of cash for you. Any additional contributions you make will attract tax relief. This means that if you pay through your payslip you end up paying less income tax, because contributions are taken out of your gross – untaxed – pay, thereby reducing the amount you pay tax on.

Pensions may be the most effective way, but they are by no means the only way to save for your retirement.

Set up a standing order for a small sum of money to go into a stocks and shares ISA each month. You don’t have to sacrifice a large amount. Even a small sum will grow nicely. The beauty of starting to save now is the length of time that you will be giving your money to grow. Start small but start now and it could turn out to be the best investment you make.

Even if you stop working, you can still save into a pension. A good way to prepare before a career break is to review how much you have saved in your pension and what your state pension age will be.

When you return to work, you should consider paying additional contributions to compensate for the period when your contributions were lower.

5. The 1% difference

According to our research, the average pension pot for a man currently aged between 25-34 will be worth £142,836 at the State Pension age of 68, falling to a pot of £126,784 for women – a gender pension gap of almost 11%.

This is primarily a result of women still earning less and taking time away from their careers to raise children or to care for a sick or elderly relative, referred to as the ‘motherhood penalty’ and ‘the good daughter penalty’, respectively.

Our state of the nation report, ‘The Financial Power of Women’, however, shows that women could close the gender pension gap by dedicating an additional 1% of their salary towards their pension early on in their careers. This is an average of just £35 per month in contributions over 39 years. So tell the young women in your life to start saving early!

For women at or approaching midlife, accruing a substantial private savings pot is important to keep children and other family members afloat, especially during periods out of full-time work. Aim to maximise your pension contributions when part of a workplace scheme as this will help fill in any gaps and ensure you get the most out of government support you may access later in life.

You may also like Pension Access – What You Need To Know and Financial Independence For Women In Midlife – Why It Matters

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Last Updated on February 1, 2023 by Editorial Staff