You need to save twice your salary by 35 and other lies – what you really need to be saving revealed

Millennials struggling with costly rents, crippling student loan debts and low incomes are questioning how on earth they can put away sufficient sums for a comfortable retirement.

Earlier this month, a story on a US financial news website which stated that “by 35, you should have twice your salary saved” caused a huge furore among young people.

The advice in MarketWatch came from retirement experts at Boston-based investment firm, Fidelity Investments.

These experts prompted a massive backlash by suggesting that, for example, if you’re 30 years old and earning about Sh4 million a year, you should already have a cool Sh4 million in your savings account.

And, that by the time you are 35, you should have double your annual salary in savings (a not insignificant Sh8.1m).

The response

Outraged 30-somethings took to social media in their droves to talk about the struggles they face with their finances, and the many obstacles which make it almost impossible to save for retirement.

They also mocked the idea with their own suggestions of life goals.

But while the internet roasted the experts and panned this advice, what do some of our pension experts closer to home have to say about all of this?

Don’t read too much in to these findings

While young people today do need to save for retirement – and should do so as a priority – the problem with rules of thumb such as the one from Fidelity Investments, is that they are academic calculations, and can cause unnecessary stress.

Sarah Coles from adviser Hargreaves Lansdown , said: “They don’t take real life into account – so they are meaningless for the vast majority of people.

"The pensions figure is based on the common advice that people need to save between 12 percent and 15 percent of salary a year for a decent retirement.

"But while this is a useful indication of the pot people need to save, it’s a pipe dream for the average 20 and 30-something who has rent to pay, a home to save for, and possibly student loans.”

She added that rather than focusing on a random figure, the most important thing is to make a start.

“Pay in whenever you can afford, as soon as you can afford to do so,” she said. “In terms of setting a goal, think about your own circumstances – and how much you will personally need to save for retirement.”

If you are looking to start tucking money away, it’s worth having a rough idea what you should be aiming for.

Recent figures from investment firm, Royal London, suggested the average person will have to save Sh35m over their lifetime to enjoy a basic income in retirement.

The good news is that all employers are now required to pay into a pension on your behalf - and you also get to put money into your pension tax-free.

So if we take the example of someone earning Sh3.6m a year, and assume this salary rises with inflation.

And let’s assume they are aiming for a pension of Sh35m (in today’s terms and so taking future inflation into account).

To hit that number, if you start saving at 20 you need put away Sh 14,595 a month from your take-home pay, and you'd have twice your salary saved by 38.

If you wait until you're 30, you need to save Sh25,737a month, and you'd have saved double your salary by 42.

This is based on the assumption that investments grow by 3 percent a year in real terms after charges, that the saver increases their pension contributions each year in line with inflation, and that they retire at 68.

It’s also important that you take inflation into account. If your target figure is Sh35m, you don’t want to aim for a retirement figure of Sh35m in 30 years’ time.

Assuming inflation at 2 percent, a value of Sh35m today would be worth Sh64m in 30 years’ time. If inflation was at 3 percent, a value of Sh35m would be worth Sh85m.

While pension projections such as those from Fidelity Investments can be useful as a guideline, you shouldn’t read too much into them.

Patrick Connolly from adviser Chase de Vere , said: “They should be taken with a pinch of salt.

"Different people will have different circumstances and objectives which affect how much they should save. They may wish, for example, to retire early or they may have other investments which they can use in retirement.”

You also need to factor in State pension provision, as well as any housing wealth you may have. In addition, you need to consider the fact you might go on working way past retirement age.

Connolly added: “The size of somebody’s pension fund depends on when they start saving, how much they invest, how much they increase this by, how their investments perform, how much they pay in charges – and when they take their pension benefits.”

While it’s important to only ever see projections as a guideline, it’s also vital to ensure that you don’t get to 60 and realise you’ve not saved anywhere near enough.

So what can you do?

The best approach for pension saving is to join your company scheme if you have access to one. Vince Smith-Hughes, retirement expert at Prudential, says: “You should join your company pension, save as much as you can as early as you can – and make the most of your employer’s contributions.”

These schemes are usually good value and all employers have to pay into their eligible employee’s pensions. If they are not already doing so, they will have to as auto-enrolment is launched with all employers.

Even if you can’t afford to save much to start with, it’s better to do something than nothing at all.

Remember that the money you invest first has the longest time and more chance to grow.

Increase your pension contribution when you get a pay rise. Connolly said: “Look to pay in more as your salary goes up and also as you get older. You might also have less daily expenses, for example, when children leave home or mortgages are paid off.”

There are big risks if you delay saving into a pension, or don’t increase the amount you save over time. Connolly says: “If you do this, you’ll have to save more to get back on track, but life doesn’t always work out as you expect, and it could be that your career doesn’t progress as you hope, or that you’ll have additional expenses in the future, such as having children or getting divorced.”