Prime Retirement Index: Guiding you to a comfortably retirement

One of the main questions we are commonly asked is, “What are some guidelines we could use to know if we are on track for retirement?”

While certain desired lifestyles will vary from person to person, we will commonly use the Prime Retirement Index to showcase the benefits of reaching certain goals at various points in your life, which will help with your retirement plans.

Early Career (35 Years Old)

For those who are early in their careers, the first goal is to have at least 1x your pension fund by the time you reach 35 years old. This is a fantastic starting point for the vast majority of workers, as it not only allows their contributions to work over decades, but it will also start the habit of setting aside additional funds, boosting their pension pot, as they progress further into their careers and begin to earn more.

While it is important to have 1x your salary in your pension fund at this stage, if you were unable to reach this, or you fall just short, it’s not entirely the end of the world, as there is still plenty of time for you to set aside funds and allow for the annual returns to work in your favour.

Mid Career (45 Years Old)

The next crucial stage for workers in this index is to aim for 3x their salary within their pension fund. Again, while not as vital as the next stage, this objective is often seen as the stress test of the index, as it can be quite impactful if you are beginning to fall behind on your contributions. As you get further into your career, not only will you have to contribute to match the index, but your contributions will have less time to work for you, and it may become more difficult for you to match the contributions needed to reach the end goal.

However, at this stage. You can take a higher-risk portfolio, as there is still time for compounding to take effect and with market returns and contribution amounts, the potential for early retirement planning could come into effect.

By looking at the historical returns over the last 30 years and creating a forward-looking estimate, if you were to take a balanced or growth portfolio, your final pension pot could still sit between 11-14x your salary, which not only sits you comfortably in retirement but also allows for either additional funding or safety nets in case of any unexpected expenditures in retirement. Even if you were to follow an extremely conservative portfolio that happens to provide a return of around 2%, you will be retiring with around 10x your salary. Enough to retire comfortably, with some possible minor cut-backs depending on what your orginally envisioned for your retirement.

Pre Retirement (55 Years Old)

This stage of the index is marked as the most crucial point for the index for several different reasons.

For example, if, for whatever reason, you were short on your contributions towards your pension pot and are currently sitting around 5x your salary, the need for a more aggressive portfolio or a significant increase in your contributions is paramount if you wish to reach the overall goal of having around 11x your salary in your pension pot.

At this stage, a net return of around 6.5% (An incredibly strong bull market prediction) for the next ten years will be required to prevent a shortfall from happening, and if we were to look at the average returns from the last 1-30 years, this will only be achievable by taking a very aggressive portfolio, built entirely on equity

If this option is too much of a gamble, your next possible path will be contributing 25% of your salary towards your pension pot. With a balanced portfolio, you could potentially see your pension hitting above the 11x target by 65.

The real danger at this point is if your pension pot is only sitting around the 3x salary mark. If you are currently in this situation, not only will you have to begin setting aside around 30% of your salary towards contributions, but you also have to work alongside an extremely aggressive portfolio in the hopes of reaching a return of 6.5%.

If you are currently at this point, it’s best to acknowledge that you are currently ten years behind the desired target, and that a shortfall in your pension fund is likely to happen unless you are able to make severe changes in your pension contributions and that the annual return is extremely strong over the course of the next ten years.

It’s at this point that it’s best to look at some of the other options available to you, such as making significant lump sum top-ups, or, the more likely option, delaying your retirement and continuing to work until you are 68-70, or are able to cover this shortfall

While the Prime Retirement Index isn’t something you should absolutely live by, as it doesn’t take into account the various things that life can throw at you  (Mortgages, Unexpected Health Issues, etc). It is one of the most effective ways to ensure that you will live the lifestyle you want to retire with.

Looking to take control of your financial future? Get in touch with our team of Certified Financial Planners today, and find out more about what you can do to help you get started