A government study from a few years ago by the Office of National Statistics did some research into our financial planning behaviour in the UK. It looked at six different areas of financial life, showing what we as a population here in the UK are both good at… and bad at.
The results were interesting, but perhaps not very surprising.
They showed that when it comes to day-to-day money management, most of us are pretty good. ‘Making ends meet’ came top (with an average score across the population of 7 out of 10), closely followed by ‘controlled spending’ and ‘organised money management’ (both at 6.7 out of 10) and finally ‘choosing products’ (6.6 out of 10).
But there were two areas where we were not so good. ‘Staying informed’ averaged out at 3.2 out of 10, and ‘planning ahead’ scored a paltry 2.3 out of 10!
So what does this mean?
Well, it suggests that most of us aren’t very good at planning ahead for things we won’t feel the benefit of relatively quickly. In short, we need to plan better.
We need to carefully consider how the decisions we make now will impact on our future selves. Which means balancing our tendency to favour financial decisions that bring a quick reward, against doing better in the longer term.
Some financial choices are more exciting than others, though, right?
Our enthusiasm to get a mortgage is likely to be high, for example, because it’s a financial adventure that gives us an immediate benefit. We can buy the home of our dreams (or - at the very least - a home to live in).
But for many people, the appetite for retirement planning is likely to be much lower because we don’t see the benefits until perhaps decades later. Many of us prefer to have money today, rather than save it for tomorrow.
So what can we do now to make sure we’re better off in the future?
Saving into a pension is a good start. Pensions are designed to overcome our tendency to think about the short term by keeping our money safely tucked away until we’re older.
One of the best reasons to use a pension to save for retirement is tax relief. When you pay into your pension, some of the money you would have paid to the government as tax goes towards your pension instead. This can help reduce the amount of tax you pay and boost your savings for the future.
Current rules aim to encourage people to save into a pension by automatically enrolling them into workplace pensions. This quietly helps them build up a pot of money for later in life (unless they actively choose to opt out).
But just saving the minimum auto-enrolment amount into a pension is unlikely to be enough for most people.
And this is where planning ahead comes in
Planning ahead for retirement is just as important as planning your career, getting married or having a family. And there’s a lot to get your head around.
• How much do I need for comfortable retirement?
• What are my current pensions and other savings worth now?
• What could they be worth when I retire?
• Am I saving enough?
• What can I do if there’s a shortfall in my plans for retirement?
By starting to get answers to some of these important ‘big questions’, you’re much more likely to make positive choices now that will help you achieve a better later life.
For example, you might decide to track down all your pensions and bring them together in one place. You might start saving more into your pension. Or you might realise you’d benefit from getting financial advice.
All of these are relatively small steps you can take in the short term that will help you further down the track.
Get cracking straight away – you’ll be really glad you did
The earlier you start actively planning for your retirement, the better off you’re likely to be. This is certainly true in terms of your long-term finances, but the surprising thing is there are real short-term emotional benefits as well.
Taking control of your plans for life after work actually feels really good. It brings proper peace of mind. In fact, you’ll be absolutely amazed at how taking a few small steps on your retirement planning journey can improve your sense of well-being in the here and now.
So what are you waiting for?