Last updated in July 2020
How much savings by age should you have? Even though having savings is essential, nobody tells you how much you actually need. Even in schools, this topic is hardly ever touched upon.
Personally, I have always been the person to have an equal amount of savings irrespective of my age. Largely, because retirement always seemed so far away (and it still is). There are so many needs in the present and there is still so much time in the future. Yet, when asked, people will almost always reply that the best day to start saving was yesterday.
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Lack of savings in the UK
The majority of young adults (53%) have no savings at all. And the lack of savings is not only a problem for young people. Only 67% of people aged 35-44 years have more than £100 in their savings account. According to Money Statistics, 9.79 million households within the UK are without savings. Finder has a brilliant graph that neatly highlights the fact that savings are decreasing:
Average savings by age in the UK
The average savings by age in the UK for 2017 are as following (source: Statista):
- Age 18-24: £8,000
- Age 25-34: £11,000
- Age 35-44: £16,000
- Age 45-54: £26,000
- Age 55-64: £37,000
- Age 65-74: £49,000
- Age 75+: £38,000
Note that “average” does not mean optimal.
Why are savings important?
Savings are important for a number of reasons, particularly to
- plan your escape from the nine-to-five office life and retire early
- be able to afford weddings, holidays, etc.
- avoid financial difficulties during illness or if made redundant
- be able to live comfortably in retirement
- feel safe and reduce money-related anxiety
- build generational wealth and leave your children an inheritance
How much savings by age should you have?
Emergency fund and general savings
Savings in your emergency fund (money reserved for emergencies) and general savings (for once-a-year costs, holidays, purchases, etc.) are not age dependent. However, they are a must-have before you even think about retirement.
How much should be in my emergency fund?
As for your emergency fund, you should have three to six times your monthly expenses saved up. The exact amount depends on your preference and your individual situation. For example, if you are self-employed, or have no family you can rely on, you may want to save more than six times your monthly expenses.
How much savings should I have?
The amount of general savings really depends on you! Do you want to go on a fancy holiday every year? Do you want to buy a new car or a shiny TV? Many people also save for important life events such as their wedding. If that does not appeal to you, you may at least want to save up for Christmas to buy presents. Personally, I stash away £50 each month to cover future expenses that are not emergencies.
If you do not have any savings at the moment, start by building your emergency fund before doing anything else.
How much savings by age for retirement should I have?
Fidelity, an American financial services corporation, recommends looking at your salary to determine the amount of savings you should have for retirement. At age 67, you should have 10 times your pre-retirement income saved for retirement. This means when earning £35,000 a year, there should be £350,000 in your retirement pot.
To reach this goal, Fidelity offers a guideline of how much savings by age you should have:
How to save enough for your pension
To save ten times your income by age 65, Fidelity recommends you save 25% of your income per year if you start aged 30. This includes your workplace pension contribution. You can make this even easier by saving 25% of your monthly income every month. This way you can factor in your pension contribution into your monthly budget.
Should you start later than at 30 years, you have to save a higher amount to make up for the previously missed saving installments.
Not enough Pension savings – what to do
Fidelity provides clear milestones that help you achieve your retirement goals. Easy on paper but hard to turn into reality. People often have other expenses that prevent them from saving for retirement e.g. university fees, weddings, children.
If you currently have less in you pension than you should, it may be time to increase your contributions. Depending on your situation, you may want to look into making extra money or reduce your expenses.
Here are some starting points:
There is no reason to get depressed if you are nowhere near the required sum. Just try your best to catch up while still leaving enough money to enjoy your life.
Limitation of this savings by age recommendation
Fidelity’s retirement savings by age recommendation is a model and as such, should be used carefully. Your salary may increase over time (which is good), but can also decrease. For example, you could take time off work to care for children or due to illness. Or you could discover that you want to work in a lower-paying but more fulfilling job.
Life is not predictable so I recommend saving more than 25% in good periods to be prepared for the bad times.
For some, having to save “only” 25% of their annual income may be an excuse to waste money once they have fulfilled their savings quota. This will mean these people will remain trapped in the rat race and have to work until they are aged 65, when in fact, they could have reached financial independence and retired in their 30s or 40s.
Another limitation of Fidelity’s savings model is that it is based on today’s circumstances. It may seem unlikely but in the future, living costs could increase dramatically so that today’s 25% would not be enough. Equally, living costs could decrease and you may not need all that money you saved for your retirement (a good problem).
Lastly, Fidelity’s savings model is hugely age dependent. If you want to retire at age 30 rather than 65, this model may not work for you. Instead, you need another way to find out how much savings you need.
The 4% rule to retire early
This method is commonly used by people who are pursuing financial independence and early retirement (FIRE). It acknowledges that age is not always a deciding factor when planning your savings for retirements and gives you the freedom to set your own retirement date. For example, you could be able to retire with 30, rather than 65 as Fidelity suggests.
To calculate the amount of savings you need, take your desired annual post-retirement income and divide it by 0.04 (4%). If you are unsure what your income should be, take a look at your current annual expenses. This is the minimum amount of money you need to save. You may want a little more if you plan to travel a lot or take up a new hobby.
The 4% rule works because if you withdraw 4% from an investment that earns around 5% interest (after inflation), you will, in theory, never run out of money.
How much savings by age should you have? summary
The takeaway message from this post is that you should save as much as you can and start as early as you can, no matter what age you are now. Each day brings you one step closer to retirement and you will be there in an eye blink. So do not waste your time, start saving!
More realistically, you should always have three to six times your monthly expenses in your emergency fund plus additional general savings according to your circumstances.
For your retirement, you should aim to have ten times your salary at age 67. How you get there is less important, but you may want to follow the milestones provided by Fidelity. Alternatively, you can save 25% of your income every year for retirement so you will be ready by 67. Be aware that Fidelity’s model is not free from limitations so I recommend saving a little bit more.
If you are like me and do not have enough in your retirement pot, you may wish to create a regular income stream from side hustles to supplement your pension.
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