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It is imperative that everyone follows the advice in all posts thus far to ensure that they survive financially and are able to support their family should the worst happen. The advice so far is pretty standard and, with some discipline, easy to follow. It is now that you need to begin to make financial descisions.
At some point it is likely that you will need to increase your pension contributions above the minimum required to take full advantage of your employers contributions. Ideally, you should be contributing the maximum amount allowable by revenue for your age. Due to increasing life expectancies, you must assume that you're going to live until at least 90 when creating your financial plan. Depending on what age you want to retire at, this could mean up to 35 years in retirement. For some who retire at 55, this will mean that they will need to fund 35 years of retirement during their 30 year working life. Therefore, you can see the importance of saving early in your pension. However, you need to decide if you want to purchase a house first.
Some people are happy to rent - perhaps in the knowledge that they want to retire in a foreign country or that they are a single child and are expecting a house as an inheritence. However, it is not advisable to rely on inheritences as part of your financial plan - your parents/grandparents may well be alive when you are trying to put your three children through college.
Most people will want to purchase a house at some stage early in their lives. However, this can pose problems as your expenditure is likely to increase when you purchase a home due to maintenance and other issues. You will also have to stretch yourself financially and will probably have a huge mortgage which you will need to get down to a comfortable level.
For most people, pensions and mortgages are the two primary areas of concern when it comes to their finances (after their debts are paid off of course). It would be a mistake to concentrate on one and completely ignore the other. Therefore, you need to decide if you want to increase your pension contributions, save for a housing deposit or some combination of both.
I highly recommend doing a combination of the two. Obviously, if you want a house, you'll need to start saving towards that immediately. However, if you ignore your pension, it is likely that you will eventually buy a house and move in. Your expenses will then increase with the mortgage amongst other things and you are likely to continue to ignore the pension despite your plans to start concentrating on your pension after the house purchase. You will likely then plan to start the pension when you get a few annual payrises and your mortgage is more comfortable, then comes the kids. This will drain your finances until they are through college at which point you will wake up aged 50 with very little years left to save towards a retirement that could possibly last 35+ years.
In my opinion, the one valid exception where you should concentrate entirely on saving for a house (or, if you already own a home, investing directly as opposed to through a pension) is where you are currently a lower-rate taxpayer but expect to move to the higher-rate bracket in the next 3 or 4 years due to expected payrises. In this case, you should postpone investing in a pension (apart from the amount required to take advantage of employer contributions) until you move to the higher-rate bracket. At this point, you should start investing the portion of your salary on which you pay tax at the higher rate into a pension - if possible, up to the maximum allowed by revenue for your age.
The beauty about a pension is that it will usually come directly out of your salary before you see it and increasing your contributions is usually simply a matter of informing your employer. There are various theories about how much you should be contributing to your pension. Some people recommend the maximum allowable by revenue, some recommend to contribute the portion of your salary on which you pay tax at 40% and others recommend dividing your age by 2 and contributing that percentage of your salary to your pension every year until retirement.
Personally, whilst saving for a deposit for a house, I am contributing 12% of my salary to a pension. I started at 23 years old and decided to use the AGE/2 method to decide what to contribute. This is below the 15% maximum allowable by revenue but should be ok whilst I'm saving for a house. In my opinion, as long as you are contributing pretty close to half your age whilst saving for a house, you should be fine.
You should note at this point that, the beauty of starting early is as follows: Those whom advocate the AGE/2 method advise that you contribute half of whatever age you begin your pension as a percentage of your salary for the remainder of your working years. This means that, if you start at 22, they advise that you save 11% of your salary per year until you retire. If you start at 42, they advise you save 21% of your salary per year until you retire. Do you really think that if you don't start saving now that you will be able to afford the increased percentage when you eventually do start a pension?
In order to both contribute to a pension and save for a house, you may need to relook at your budget and see if there is anywhere that you can reduce your expenditure or increase your income. You may not want to make certain sacrafices but buying a house will always involve sacrafices and it will get easier as time goes by - your salary increases with inflation but your mortgage doesn't.
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Posted by financialplanning on 2007-08-24 07:54:56 | Rating: | Views: 263
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