Retire comfortably: 3 rules you must follow

Follow these three tips to avoid running out of cash in your old age.

Do you think you are saving enough for your retirement? If not, you certainly aren’t alone.

A study by the Saffron Building Society found that just one in five are confident they will have enough money to sustain them in their retirement.

To help out, Fidelity International has come three rules of thumb that savers need to bear in mind to ensure they have the most comfortable retirement possible.

The power of seven

The first big question that most of us have about retirement is just how much we need to have saved to be able to stop working and not spend our later years counting every penny.

Fidelity found that households who managed to save seven times their annual household income by the time they hit 68 should be able to retire and maintain a similar standard of living as during their working years, which is really the dream.

Of course, while that sounds pretty simple, it actually means building up a pretty sizeable pension pot.

If you have a household income of £50,000, that means putting together a pot worth a mighty £350,000. 

But you have to start somewhere and setting yourself goals and milestones to reach will make it a bit more achievable.

Fidelity suggests aiming to have the equivalent of your annual salary saved in your 20s, then twice your salary in your 30s, and so on until you hit seven times that salary by 68.

That doesn’t make it less of a big ask but, by breaking it down into smaller goals, it may help you hit that target.

Lucky number 13

I’ve never been one for superstition, and by the looks of it, neither are Fidelity, to the extent that it reckons 13 may actually be a lucky number when it comes to your pension saving.

It suggests that 13 ‒ or rather 13% ‒ is the key to building a decent pension pot.

If you save at least 13% of your pre-tax income every year, between the ages of 25 and 68, then you’ll be well on the way to a comfortable retirement.

Again, this may seem a huge ask but thanks to the auto-enrolment scheme, which forces bosses to not only open a pension on their employee’s behalf but contribute towards it too, it isn’t necessarily that tough. 

After all, if you’re participating in the scheme already, that’s 8% taken care of already ‒ it’s then up to you to dig a little deeper and make up that shortfall, either by adding more to that workplace pension or even going with an alternative vehicle like an ISA.

Of course, this is reliant on you getting into that saving habit at 25.

Leave it later and you’ll need to save more each month in order to build a proper pot, with Fidelity suggesting it rises to 15% of your gross income if you leave it until 30 and 18% if you hold off until 35.

No more than 5%

It’s not enough to work out how much you need to put in the pension pot though. Thanks to pension freedoms, you also need to think carefully about precisely how much you take out of it once you hit retirement too.

After all, there’s no point having the discipline to build a brilliant pension, only to go and blow it all once you finally wave goodbye to work.

Fidelity has run the numbers and reckons that if you retire at 68, and live for 25 years, then a withdrawal rate of between 4.1% and 4.4% may be sustainable, though you should not go any higher than 5%.

Obviously, this will change as your circumstances change, as well as things that you have no control over, like inflation and the returns on your pension investments.

But taking it slowly rather than cracking open the pension pot and splurging the money everywhere is a sensible option.