How to save for retirement when money is tight

It can be hard to think about the future if you’re living from paycheck to paycheck, but it could be worth trying to plan ahead for it by making the right choices now.
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When the furthest ahead you can financially think is your next paycheck, planning for your retirement may feel like a silly fantasy – especially it still seems so far away. But, like it or not, old age creeps up on us all. Unfortunately, whether or not you’re prepared for retirement is often down to your preparations early on.

Here are a few things you could try if you want to get ahead of your future and make your retirement years a bit more enjoyable.

Understanding your budget

It doesn’t matter what stage you’re at in life, how much you earn, or where you might think you’re

at - understanding your budget is crucial if you want to be able to save. Chances are, if money is tight, you’ve probably already done some budgeting in order to make ends meet. However, things can change – things like your gas and electricity prices can creep up, your broadband may have increased, or your insurance premium has gone up unexpectedly.

You may want to think about regularly checking your budget, whether that’s weekly, monthly, or just every so often. Staying engaged with your money should give you a better understanding of how and where you’re spending and offer more ways to save.

Changing your way of thinking

When money’s tight, saving can feel impossible. If this sounds familiar, then you may want to consider starting as small as possible. Why not put £1 aside here or there over the course of a month? Even if it’s just £1 saved, that’s more than you would’ve had otherwise!

The important thing is to try not to touch that money. Obviously, that’s a lot easier said than done, but there are some things you could try to help you out. For example, by setting up a separate savings account – even if it’s easy access – you won’t have that money in your current account and may be less likely to spend it as you’ve put in an extra step to get it. It’ll still be there if you need it, but it could build up nicely if you keep adding to it.

It doesn’t have to be big amounts

Saving is a gradual thing, and one of the best ways to do it is to build it up pound by pound in a sustainable and affordable way. This means what works for you and not just picking some random percentage or fixed amount. If you can afford to put away £10 then that’s great, if you could increase it to £50 then even better, and if all you can manage is £1 – then guess what? That’s fine too. One in ten Brits have no savings at all1 and a third of Brits have less than £600 in savings.1

Once you start putting money aside, you could begin to plan for your future by setting yourself specific savings goals to work towards – such as working towards financial independence.

Money right now, or in the future

Perhaps the hardest thing about managing money when times are tight is the lack of instant reward you get from saving. If you’re already scraping to get by, then putting money aside for the future may seem counter-productive – and sometimes, you might not be able to. However, being able to be flexible with your savings is a good thing. Not everybody lives in a perfect little world where you know exactly how much money you’ll have coming in and going out each month.

But that said: if you can save for the future, then the earlier you start the more time you’ll have to build up a decent pot. For example, say you can put away £50 a month – after a year you’ll have £600, and in five years you’d have put away £3,000. But while that’s a good chunk of money, it probably won’t see you through retirement.

How to know how much you’ll need to retire

This is the big question: how big does your pension need to be for retirement? There’s not really a blanket approach to this, as it depends on a huge number of factors – for example, where you live, what your retirement outgoings may look like, and when you’re planning on finishing work for good.

We created a pension calculator to help give you a better idea of how your pension may look. This could then give you a better understanding of how much you’ll need to save to retire. The best thing is, there are even some ‘what if’ scenarios to help you achieve your target goal.

How costs change when you do retire?

It’s often said that costs change when you retire, and it’s implied that you’ll be spending less than you are now. However, you could be equally likely to end up spending more on things like travel, medication, or insurance.

If you own a house, then the likelihood is that you’ll have paid off the mortgage by the time you retire. That said, more and more people are now renting instead of buying a house,2 and if you’re renting when you retire then this cost is unlikely to change.

On the flip side, some costs that are likely to change when you retire are things like your income tax and National Insurance, which could create substantially more room in your monthly budget.

What age do you want to retire?

Most people want to retire early, but is it actually achievable? There are a few things to consider here. Firstly, retiring early means you have less time to save and will spend more time using your pension. That’s great if you can put away a lot of money each month to prepare for this, but if you’re struggling to save into your pension then you may want to consider delaying your retirement by a few years.

The longer your retirement journey, the more time you have to save – and if you’re too old to start early, then something to consider is whether you could finish working later and give yourself more time to put money away in a pension. By using our pension calculator, you’ll be able to see what the impact of delaying your retirement by 5 years could have on your retirement pot.

Ways to start saving

A good place to start could be by setting yourself a goal. If you know how much you’ll need for retirement, and when you’re likely to be able to reach that goal, then you’ll have a good guide on how much you’ll need to try and squirrel away by then.

Here’s a few things that you could try to get into the habit of saving:

  • Little and often – a bit of money here and there that you can put away and not touch could make a huge difference to how quickly you can reach your goal
  • Create an emergency savings pot – having a pot of money that’s specifically for emergencies could help to reduce stress and provide a financial cushion
  • Use your tax benefits – with an ISA, you can save or invest up to £20,000 a year (in 2021/22) without paying tax on any interest or capital gains you make - meaning you get to keep more of your money. And if you’re saving for your future, then Personal Pensions give your money a 25% uplift – increasing every £100 you contribute turns into £125! However, it’s important to note that the ISA allowance could be subject to change each year.

Make every little bit count

Saving money is great, but one thing you might want to keep in mind is the impact that interest rates and inflation could have on your savings over the years. As time goes on, things typically get more expensive due to an economic term called ‘inflation’ which is measured by a percentage increase. So, for example, if your savings account is only getting 1% interest but inflation has risen by 2%, your money is effectively decreasing by 1% in real terms.

If you want more options to give your money more potential, you could try investing, especially if you already have a good amount in your emergency savings. And while investing may sound difficult and complicated – and not to mention expensive – that doesn’t always have to be the case. With Wealthify, the hard work is done for you by a team of experts who will choose exactly what you’re invested in. They will then constantly monitor the market to keep you on track.

Of course, with investing you are taking a risk with your money, and sometimes you may see it go down in value. By taking a long- term approach, statistics indicate that there could be opportunity for you to make a gain – for example, if you’d invested in the UK’s 100 largest companies (FTSE100) for any 10-year period between 1984 and 2020 you’d have had an 89% chance of making a gain.3

Thinking about giving it a go? With Wealthify, you can set up a pension in just minutes and get started with just £50. And with flexible payments, if money is tight then you can change or stop your contributions at any time – no pressure and no questions asked. This is a pension that’s designed to be as flexible as your day-to-day life.

  1. https://www.finder.com/uk/saving-statistics
  2. https://www.brookings.edu/essay/uk-rental-housing-markets/
  3. Data from Bloomberg

Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.

Please remember that past performance is not a reliable indicator of your future results.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

You should seek financial advice if you are unsure about investing.

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