Before we get to the P word, let me quote some truisms that apply to most people. First, the biggest asset most people will ever own is their home. Second, the biggest debt they will ever have is their mortgage. Third, the biggest pool of money that they will ever have is their pension fund. The first two are fairly well known but few people seem to be aware of the third one.

There are 3 stages to our economic lives: childhood, working life and retirement. The only period when it is practical to put money away, is the second one. The reason for doing this is that when you reach 65 for example, you will have a big enough pot to provide you with an income so you will not have to work anymore. If you want to live on £30,000 a year and take an income of 5% a year from your pot, then “the pot” would need to be £600,000.

People tell me that they will be able to live on much less when they retire as the mortgage will be paid off and the children will be grown up but this is rather naive if you think about it.

i) Not having to go to work every day means you have twice as many hours to spend money – or think about how much you have or have not got – this can be depressing. ii) Your wife probably does not want you at home all day iii) My experience as an IFA also shows me that children are never really off your hands no matter how much money the parents have. They may need help with: a deposit for their first home, wedding costs etc. and one of the hardest things about being parent is saying “No” to your children. iv) Going to Australia to see your grandchild for a month as one of my friends has just done, is not cheap either. v) did you work hard all your life to have to spend the end of it, counting the pennies?

There is really no point in having a small pension. On the one hand you will not be able to live on it, but on the other hand it will probably be enough to disqualify you from State Benefits. The Basic State Pension has only been increasing at RPI since the 1980s and in real terms, is falling further and further behind earnings – the gap being 1.5% – 2% a year.

So how much do people need to invest into their pension? There is a very simple formula for this “HALF your AGE as PERCENTAGE of your EARNINGS” e.g. if you are 40 then you need invest 20% of your income.

If you want a more exact figure go to: www.pensioncalculator.org.uk

P.S. All the above assumes you have a healthy retirement. Facing an unhealthy one is now the subject of another blog “Growing Old without Dignity” http://www.georgeemsden.co.uk/?p=13

For an American view of the same issue – The Big train Wreck Coming – Boomer retirement plans are on a collision course with reality

http://www.fa-mag.com/issues.php?id_content=2&idArticle=1136

Regards George Emsden Your Financial Optimist