- Annual Income: £50,000
- Less Tax and National Insurance: £8,000 per year (estimated)
- Net Income: £42,000 per year (£3,500 per month)
- Rent: £1,000 per month (£12,000 per year)
- Pension and Investment Savings: Nil 😱
Meet Ben and his current financial situation
Let's consider an example of Ben, who is currently 30 years old and earning £50,000 per annum.
Ben would also like to buy a property and build up for a deposit of £40,000 over five years.
Retirement Needs
To maintain a similar lifestyle in retirement, Ben needs to calculate how much annual income he will require:
- Annual Lifestyle Needs: £30,000 per year. This is estimated as 60% of his current salary. It matches his net income after the mortgage has been paid off.
- State Pension: Let's assume £10,000 per year from age 70. Ben may not want to rely on there being a state pension in which case he would need to cover the full £30,000 need from his personal pension savings.
- Private Pension Needs: £20,000 per year. This is the amount of £30,000 less the state pension assumption.
Using the 25x rule for retirement savings, Ben would need:
- A £500,000 pension pot (25 x £20,000)
Savings Strategy
To achieve his retirement and property deposit goals, Ben could follow this savings strategy:
- Pension Contributions: £625 per month (preferably via salary sacrifice). This is 15% of his current salary.
- Investment Contributions: £625 per month into an Individual Savings Account (An ISA is a tax efficient savings plan). This is also 15% of his current salary.
Protection Strategy
Ben could consider how he can protect himself and his financial future with:
- An Emergency Fund: Ben should save until he has covered three months of expenditure, approximately £7,500.
- Income Protection: Insure 50% of his monthly income should he be unable to work after three months (when his emergency fund is exhausted) and pay until his state pension age of 70 years. He could budget £100 per month to pay for this.
Outcome
This would leave Ben with the following:
- Mortgage/Rent: £1,000 per month
- Remaining income: £1,200 per month leftover for other living and lifestyle expenses, including £100 for financial protection
By 69 years of age, Ben's Retirement pot will have grown to approximately £500,000 (based on the Retirement Calculator), which could provide him with the extra £20,000 income per annum he wants to maintain his lifestyle in retirement.
In 5 years, Ben's Investment pot will have grown to approximately £41,100 (based on the Investment Calculator), which could be a good deposit for buying a home.
Conclusion
By understanding his current financial situation, calculating his retirement needs, and implementing a structured savings plan, Ben can work towards securing a comfortable retirement. This example highlights the importance of early planning and consistent savings.