Stage Six to becoming debt free and setting up for financial success

Now that we are debt free, have our emergency fund set up and have saved a good deposit for a house it is now time to start saving for the long term. For many of us the first port of call will be our employer’s pension scheme. If you are self employed then it may be wise to look at what pension options are available. This may be via a private person pension scheme, self invested pension, 401k or some other form of pension product.

Really in your pension you want to be putting money that will be available to you in old age which in most countries will be around the age of 65. In some countries it may be possible to withdraw your pension cash earlier but you could get penalised for doing this so you would have to check your countries local pension rules.

In most countries you can usually get access to some form of defined contribution pension. This type of pension usually allows you to pay in a certain amount of your salary tax free. This money can then be used to buy some type of fund that has been decided by your employer and pension provider. These fund will usually include some type of local stock market tracker fund, some sort of bond tracker fund, cash fund and some type of international stock market tracker fund. It may also be possible to choose a mixture of these funds but this will vary from different employers and pension providers. There may also be a wider amount of funds that are available.

The main aim of these fund it to allow the money you put in to your pension to grow at a rate that will beat inflation and will allow your fund to grow through the power of compound interest.

It is important that you decide on these funds as there will be different risks and rewards depending upon which type of fund or which mixture of funds you choose.

For example if you are young you would usually invest more of your money in risker high reward funds that will allow your funds to grow at a high rate. But the risk would be that you could lose some money in the short term. If you are older and are approaching retirement then you may want your money to be invested in safer funds such as bonds, cash or less volatile funds however by doing this you are risking losing the possible higher rewards.

Over time and with growth this pension fund could grow to a sizable amount.

You really did need to start saving into your pension as soon as possible as there is a bit of a pension crisis. When you look at the data from the Pension Policy Institute in 2010 the average UK pension fund size used to buy an annuity was £25,874 after any lump sum had been taken. In the US the average pension fund for a 65 year old in 2015 was around $73,000-$160,000.

Neither of these funds would allow a person to live in luxury during their retirement. If you have worked and contributed to your local social security system then you may also be eligible for a state pension. However this is usually only enough to allow you to survive and will not allow you to live in luxury which is why you need to take responsibility for saving into a pension plan.

To allow you to save for a decent retirement you really need to be saving between 10-15% of your wages into your pension scheme. Your employer may also adding some money to your pension but I would recommend that this is thought of as a bonus rather than something to rely on. The reason being that your employer can remove this contribution at any time and also sometime employers do write into contracts that if you a sacked for some types of activities then they may be able to claw back their contributions to your pension.

By the time you retire you want to be looking at having a pension pot that is more than 8 times your salary. This would mean if you were earning 40,000 then you should have a pension pot of 320,000.
Another rule that will allow you to work out you required pension pot size is the 4% rule this means that you should only remove 4% of your pension pot each year after you retire so if you want 10,000 pounds or dollars per year then you would need a pot of approx. 250,000 pound or dollars. As you can see this is massively different than the current pension pot sizes.

Another thing you also need to consider is that some countries they have a cap on how much you can save into your pension before you will get penalised for anything above this amount. Really you want to keep below this amount and if you do reach this amount before your retirement age then you should look to put your pension savings in an alternative savings account we will look at this another time.

If you learn anything please start paying into your pension as soon as you become debt free as it will help you create long term wealth. These are just some basics I will try and come back to this again at a later date.

Please let me know what you think in the comments section and let me know how you are getting on with paying off your debt. Also if you have any questions please leave a comment or visit the facebook page

The Normal Person

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