Dumping cash in a pension is easy if you are a big earner, but investment managers decided to look at how retirement savers with more means managed to become pension millionaires.
After sifting through 12 years of pension data, the secret of saving turned out to be no big deal.
Becoming a pension millionaire simply means taking saving seriously from a younger age, stashing cash in a pension and holding your nerve and sticking with equities rather than converting to cash as retirement looms.
The study was carried out on US 401(k) pensions by Fidelity Investments.
Although pension rules in the States differ from those in Britain, a 401(k) is a self-managed scheme similar to a UK self-invested pension plan (SiPP).
Start saving early
The firm looked at how 5,500 customers earning up to $150,000 a year (£93,250) had managed their 401(k) schemes since 2001.
The idea, said the firm’s Jeanne Thompson, was to see how middle-income retirement savers became wealthy retirees.
The most important decision most of the savers made was to contribute around 20% of their annual earnings, split as 14% from their own bank accounts and the rest as employer contributions.
Many started saving early and had squirrelled away $400,000 by the time they were 50 years old, which mushroomed into $1 million or more a decade or so later.
“The key is to start saving early,” said Thompson. “In practical terms someone in their 20s won’t be able to put such a large percentage of their salary into retirement savings, but they should try to put as much as they can aside.”
Setting a target
In currency terms, $1 million is about £600,000, but is that a reasonable amount to expect for retirement savings?
Fidelity reckons whatever the currency; the rule of thumb is to aim for a pension pot of around eight or 10 times final salary.
The average salary for savers in the survey was $120,000, which is around £75,000 a year. In Sterling, that equates to a pension pot of £960,000 – £1.2 million.
Thompson stresses that the end figure is not as important as the amount of cash regularly contributed to a pension.
In the UK, pension contributions pick up tax relief at the highest rate paid – so anyone earning more than £32,010 has 20% added at source and another 20% top-up after submitting a self-assessment tax return.
