At 40, be thrifty and prioritize your retirement


2021 marks a milestone for millennials: the year in which the generation born between 1981 and 1996 will turn 40 years old.

This is often a personal finance “wake up” moment when people pull out and look into serious retirement and realize that the next 20 years can go by as quickly as their children did in elementary school.

For those tempted to reach for the nettle, this is not a bad time to make that assessment: this week was Retirement Awareness Day 2021 (maybe it should be upgraded to Retirement Awareness Week next year as it actually lasts over five days) to raise awareness of the importance of saving for retirement.

Now in its eighth year, the campaign has useful resources on, is endorsed by Pension Secretary Guy Opperman – who is 56 years old enough to receive his private pension – and is endorsed by television presenter Steph McGovern, who represents Millennials .

It’s also the year that the Academy Awards winner of the best movie – Nomad land – Depicted the harsh reality of not having a nest egg for years to come – possibly the greatest media event on the subject of “pension awareness” of all time. Very few would want to spend their sixties living in a van and looking for a seasonal job.

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Most millennials will not conform to the stereotype of the avocado toast and latte-spending waste, nor the frugal FIRE (financial independence, early retirement) advocate. Millennials, however, had to wait longer than their parents to reach usual financial milestones, with home purchases occurring later (in their mid-30s) and often after having children. For many, pensions are not yet a priority.

Is it too late at 40 to organize your retirement provision? No, there are always steps you can take. And the first is knowing what to save.

According to the Pension and Lifetime Savings Association, a retired single person would need £ 10,200 a year at current prices to meet a minimum standard of living; £ 20,200 a year for a moderate standard; and £ 33,000 a year for a comfortable one.

With the full state pension paying £ 9,339 a year, you might think that there is nothing to worry about. However, you will have to wait until you are 68 years old to get it and to qualify you will need 35 years of social security contributions. Check your records on

Note that the UK’s state pension is rated by the OECD as one of the worst in the developed world and there is no NIC personal fund for you – state pensions are paid out of current taxes so there are no guarantees.

Last week, Prime Minister Boris Johnson announced a 1.25 percentage point increase in social security and dividend taxes, known as “health and social charges”, while suspending the triple lock on the increase in the state pension. The pressure on government funding is not going to ease, so it’s best to get this minimum standard of living in retirement from your own resources if you can.

Most people invest for retirement by combining the tried and tested tax envelopes of retirement and individual savings accounts (via stocks and shares of Isas instead of the cash versions). The money it contains is protected from income and capital gains taxes so it won’t be affected by the filing of the past week and possible future raids.

In addition, when you save for retirement, you will receive money in the form of an early exemption from income tax, which is of great value in the context of rising taxes. The more you pay into your pension, the less tax you pay.

For a 40-year-old, the age at which you can withdraw money from a private pension has risen to 58, as it now always takes 10 years for the state pension to be paid. So if you need any part of the money before the age of 58, you need to invest in an Isa that allows withdrawals at any time.

But having an Isa or a pension system is only half the story. How this works depends on the investment decisions you make and the fees you pay in addition to your contribution amount.

Younger workers (you are still one of them) often fail to see the benefits of taking higher investment risk in exchange for the prospect of higher returns. High risk in this context doesn’t mean crypto trading – it just means a higher percentage of stocks.

Research conducted by Opinium on behalf of Interactive Investor found that four in 10 (39 percent) under 40 believe that the most appropriate level of risk for their retirement is “medium”, with 28 percent saying that “low risk” is most suitable. Only 20 percent of workers under 40 considered a riskier pension to be the most appropriate amount for their age.

Dan Mikulskis, Head of Investment and Partner at LCP, says: “There is no free lunch. Higher-yielding portfolios are also at higher risk, but younger investors can often afford to take that risk – a fact that is often overlooked.

Over the decades the difference will be huge, he adds. If they invest all of their money in stocks, by his calculations, the average earner would expect to have £ 46,000 more in retirement than a balanced, moderate-risk fund. This corresponds to an increase in the lifetime contributions from 8 to 12 percent or a decade of longer employment.

“Every percentage point counts,” says Mikulskis. “People should think like an investor and make sure they look under the hood to see how their money is being invested and that the way their pension is being invested is right for them.”

Small fee differences can grow to thousands of pounds over the next 15-25 years, so consider reducing them. The average fee for an automatic retirement scheme is 0.48 percent. while many old-style annuities have fees of 1 percent or more. You could reduce this by changing the fund options or switching to a cheaper pension.

Popular funds among millennial investors on Interactive Investor are Vanguard LifeStrategy 100% Equity and 80% Equity, which have low ongoing costs of 0.22 percent and have delivered strong returns (I think they too).

If you start retiring from scratch at 40, a rough rule of thumb is to set aside 20 percent of your income.

But if you want to earn £ 10,000 by the age of 55, perhaps to free up for a career change, retraining, or starting a new business, you’ll either need a pot of between £ 130,000 (if you can just fill the gap want to close). Retirement age) and £ 300,000 (for an income of 3.5 percent).

With an annual growth rate of 8 percent (very optimistic), you could achieve this in an Isa by contributing £ 450 to £ 1,000 per month, which is well below the annual limit of £ 20,000 for Isa contributions. With 5 percent growth, this would be achieved at 550 to 1,500 pounds per month.

This level of savings may seem extreme, but it is what many millennials have paid off in monthly childcare bills. It is time to put your new baby in your retirement plan and take good care of her.

Moira O’Neill is the Head of Personal Finance at Interactive Investor

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