Savings destination unknown

Asking yourself whether you are saving or planning may seem like a silly question, but having worked in the field of savings and retirement for 25 years, I believe it is an essential one.

Savings destination unknown

I will try and illustrate what I mean using a personal driving analogy. My wife and I often decide to go out for a drive and there are two distinct possibilities: either we set out on the journey with no clear destination in mind and spend a lot of time, petrol and emotional energy trying to agree where we are actually going; or we have a clear goal before we set out and consequently arrive without diversion and in a much shorter time.

This is what I mean by the difference between saving and planning and is extremely relevant in the world of savings and retirement.

I am in no way saying that saving in any form is not a great thing to do and many current government initiatives are aimed at improving the nation’s saving culture.

Financial education in schools and auto-enrolment into pension schemes are two just initiatives.

What I am saying is that savings focused on a clearly defined event, date or object is far more powerful, effective and, in most cases, is achieved much faster.

Let’s think about retirement, an event that is often described as “the longest holiday of your life”.

At what age are you thinking that this will be achievable? Do you know how much income you will need, or more importantly want, to do all the things you believe you will want to do?

Look at your income and expenditure today and think about the bills that will no longer be being paid when you retire.

Then look at the current level of the basic state pension and think about how the change to a flat rate of around £155 per week in 2016 may affect you.

Additionally, look at other pension savings you have. This should start to give you an idea of the size of the gap, if any, in today’s money that you might have and at what stage you can start to think about what needs to be done to make up any shortfall (or even how you will spend any excess!).

Have you got a really clear picture of what the future looks like to you? I know many people who have a picture on the fridge at home to remind them or some who can shut their eyes and “touch and feel” the thing they are saving for. In my experience, saving for something tangible has been a great motivating factor.

With a clear picture the next stage is to make sure the “vehicle” you are in is the right one. To return to my driving analogy, if my wife and I were setting off across the desert would we choose a Ford Fiesta or a Land Rover (hopefully with air conditioning)?

Savings and retirement to me depends on three things working together – the “vehicle” (tax wrapper) you are in, the investment return you want to achieve and your tax position.

Getting these three things right will make a shorter and more comfortable journey. This is a theme I will continue to look at in future blogs.

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About Author

Andy Zanelli

Andy Zanelli is head of retirement planning at AXA Wealth

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