Magic formula that tells how much you should have saved into a pension in every decade of your life

Working out how much you will need to save for retirement may seem an impossible task but there is a useful rule of thumb that can help you check if you are on track.

It doesn’t involve doing endless calculations or projections of what kind of retirement lifestyle you hope to achieve. In fact, it is so simple that all you need to find out your own magic formula number is your current income and one other key figure.

Once you have applied this rule of thumb to find out how much you should have saved in your pension, you can use our guide to work out how to make sure you are on track for the retirement you want.

It works like this. You should save the equivalent of a year’s salary by the time you reach 30, then a decade later, you should have three times your annual salary at that age, saved for retirement. 

By age 50 you should have six times your income save, by 60 you need eight times, and by the time you reach retirement age at 67, you should have ten times your final salary saved into a pension.

Business activist and investment guru Gina Miller advocates this simple check. She says: ‘As a rule of thumb, you should have saved one times your income by 30 – and ten times by the time you retire.’

The beauty of this magic formula is that it should work whatever you earn. So, for example, if you make £30,000 at the age of 67 you will need £300,000 saved, but if you earn £70,000 you will need £700,000.

However, the precise amount will depend on your circumstances and the retirement lifestyle you want. The rule of thumb assumes your retirement lifestyle will be in line with the one you enjoy while you are working. 

If you are willing to pare back living costs in retirement, you may need less than the rule of thumb implies. Similarly, you may need more if you want to boost your retirement lifestyle.

Of course, the formula makes several broad assumptions. For example, it assumes you work every year until retirement, whereas most people have periods out of work due to caring responsibilities, poor health, unemployment or to retrain.

Here, Money Mail investigates what you need to do to hit each target along the way. Our calculations assume you earn a median average salary for people of the same age group at every decade, using figures from the Office for National Statistics (ONS).

The figures also assume that your retirement savings are invested in a pension, where they grow by 5 per cent a year, with an annual account fee of 0.15 per cent a year and investment charges of 0.2 per cent a year.

By age 30

If you start work at the age of 22, that will give you just eight years to hit the first target of saving the equivalent of your entire annual salary into your pension by the age of 30.

Workers aged between 22 and 29 earn an average salary of £32,292, according to the latest ONS figures. 

If you are paying into a workplace pension under the auto-enrolment scheme, you will be making a minimum contribution of 5 per cent of your salary, while your employer should pay in at least 3 per cent. 

Minimum: Basic rate taxpayers need to contribute £120 from their salaries to their pensions and the taxman will chip in £30

Someone on a salary of £32,292 who is enrolled into a workplace pension at minimum levels would make a total contribution of £173 a month. 

Of this, they would pay in £108 and their employer £65.

Over eight years, that would lead to a pension pot of just over £17,000 assuming it grows by 5 per cent every year. That leaves you with a shortfall of around £15,292 if you want to hit the first target.

So you will need to contribute an extra £150 a month into your pension. The good news is that some of that money will come from the taxman in the form of tax relief. 

If you are a basic rate taxpayer, you need to contribute £120 from your salary and the taxman will chip in £30 to make up a total of £150. 

That means you only need to add an extra £1,440 a year on top of your auto-enrolment minimum pension contribution to hit £32,292 by the age of 30.

Daniel Hough, financial planner at RBC Brewin Dolphin, says this is ambitious, especially given the financial pressures on young people, from student loan repayments to housing. 

‘For someone who is 30, one times their salary is probably going to be a stretch when they are just starting out in their career, are likely saving for their first property and could have a long list of other potential life events coming up,’ he says.

By age 40

Miller’s rule of thumb then gives you a decade to hit your next pension target – three times your salary by the age of 40.

The average salary level for this age group is £42,796, which means you would need £128,388. Salaries generally increase throughout your midlife, peaking before the age of 50. 

Fortunately, if you’ve already amassed a £32,292 pension pot by the age of 30, you’ve got something to work with, as this will grow over time as well.

Peak earning: Salaries generally increase throughout your midlife, peaking before the age of 50

If you’ve hit this first target, you will need to put £613 a month into your pension pot from the age of 30 to stay on track to hit the target for 40-year-olds. 

However, some of this monthly sum would come from your employer and the taxman. 

If your employer pays the equivalent of 3 per cent of your salary into your pension, that would amount to £91.39 a month. Tax relief for a basic rate taxpayer would be £104 a month.

That means that of the £613, you would only have to contribute £417 a month or around £5,000 a year. This assumes that you continue to earn the average salary throughout the decade.

Chris Rudden, head of investment consultants at digital wealth manager Moneyfarm, says hitting these targets may be difficult at times of financial stress.

‘It is important to remember that salaries fluctuate over the course of our working lives and often other significant financial commitments take precedence, particularly in mid-life,’ he says.

By age 50

The Miller rule advocates that you should have six times the average salary earned between the age of 40 and 50 saved into your pension by the time you reach your half century.

According to the ONS, the average median salary drops in your 50s to £40,456, so you’ll need to amass a pension pot of £242,736.

Fortunately, if you’re following this plan, you’ll have £128,388 in the pot already, meaning you’ll need to accrue another £114,348 over a decade to reach six times the average wage of someone aged between 40 and 50.

Target: The average median salary drops in your 50s to £40,456, so you’ll need to amass a pension pot of £242,736

Investment growth will do some of the heavy lifting. 

Even if you made no contributions at all, your pension would be worth £165,926 after ten years assuming 5 per cent investment growth.

A monthly pension contribution of just over £610 would take your pension to the target amount. 

Of this, you would need to pay just over £407 a month, while the taxman would add £101 and your employer £101 as well – assuming it pays the equivalent of 3 per cent of your salary into your pension.

By age 60

Eight times the median average salary for someone in their 60s is £288,288. 

That’s because the ONS figure covers all workers aged between 60 and 70, and by the end of this decade many people have retired or cut back on working hours, which brings the median salary down. 

So, for our calculations we’re going to use the £40,456 annual salary for someone aged 50-59, as this is likely to be closer to what you would be earning if you worked full time. Eight times this sum is £323,648.

Keep it up: From the age of 60 Just over £80 a month would be enough to push your pension up to the £323,648 target

If you have stuck to the plan and therefore have £242,736 already in your pension, you’d barely have to add anything to it to keep to the suggested trajectory. 

Without any further contributions at all, you’d end up with £313,707 in your pot thanks to investment growth.

Just over £80 a month would be enough to push your pension up to the £323,648 target.

But if you are working, it makes sense to take advantage of employer contributions. 

If you stayed in auto-enrolment, you would put 8 per cent of your salary into your pension – the equivalent of £269.71 a month – of which £101.70 would come from your employer. 

Do this and you’d end up with almost £350,000 by the age of 60.

By age 67

By now, you would be aiming for £360,000 in your pension if you followed Miller’s rule of thumb to the letter. 

That is because the average salary of someone in their 60s is £36,000 – and the formula suggests you need ten times this sum. However, median salaries tend to be lower for this age group due to part-time workers.

So if you wanted a higher pension income based on the salary you received at the peak of your earnings when you were working full time, you may be better off aiming for a total pot that is closer to £400,000.

Final push: the average salary of someone in their 60s is £36,000 – and the formula suggests you need ten times this sum

With £323,648 in your pension pot, you are close to your target. A monthly pension contribution of just £160 would be enough to hit this. 

That’s below the £240 employer and employee pension contributions you would make if you were auto enrolled.

These figures illustrate just how much more important it is to make contributions early on in your working life, as this money has longer to grow. 

This ‘rule of thumb’ has you putting far more money into your pension early in your career, relying more on investment growth as you approach retirement.

Is it enough?

A £400,000 pension pot sounds like a lot, but some experts believe it wouldn’t be enough. According to RBC Brewin Dolphin, a ‘comfortable’ retirement requires a pension pot of £630,000.

If you also got the full state pension of £11,502 a year, a £400,000 income would give you around £30,700 a year to live on – below the £31,300 that the Pension and Lifetime Savings Association (PLSA) thinks is enough for a single person wanting a moderate retirement. 

That also doesn’t take inflation into account, which may erode the value of your cash. 

Those with higher salaries should have more saved, which will allow them more comfort in retirement, but they may have become used to higher outgoings, too.

To turbocharge your pension saving further, increase your contributions at times of lower financial stress – for example when your children have left home – but remember that it is the contributions made at the earliest stage of your working life that will have the greatest effect.

What if you’ve left it late?

Gina Miller recommends that savers increase their contributions and make sure they are receiving the maximum that their employers offer as well.

Miller, who founded MoneyShe, an organisation dedicated to helping women to become more confident about investing, adds: ‘Some employers will match your own contributions or even exceed them. This is a good negotiation tool if you’re starting a new role.’

Hough, at RBC Brewin Dolphin, says that the good news is that those who are in their 60s often have spare cash to throw at pension savings and can still make a difference at this stage.

‘Once many people reach 60, there is a huge relaxation in terms of the pressure on their finances – the kids have grown up and the mortgage is, hopefully, paid off.

‘That opens a lot of opportunity to significantly increase their savings and, that being the case, a lot of the heavy lifting can be done at this point,’ he says.

moneymail@dailymail.co.uk