Part 3: Financial Freedom
Part 3: Long-Term Financial Goals – Securing Your Future
Welcome back to our series on setting yourself up for financial freedom!
If you’ve been following along, you’re already on your way to building a strong financial foundation with your short-term goals and bridging the gap to your dreams with medium-term goals.
Today, we’ll dive into the final—and perhaps most crucial—part of your journey: setting long-term financial goals.
Long-term financial goals typically span over five years or more, with the ultimate objective often being a comfortable retirement.
But retirement isn't the only goal worth planning for in the long term. Let’s explore how you can set yourself up for a secure and fulfilling future.
Why Long-Term Goals Matter
Long-term financial goals are the cornerstone of your financial strategy.
They require patience, discipline, and a bit of foresight, but they offer the most significant rewards.
Whether you’re dreaming of retiring early, buying your first home, or achieving financial independence, long-term goals keep you focused on the bigger picture.
Why should you care about long-term goals?
Take Advantage of Compound Interest: The earlier you start saving, the more time your money has to grow through compound interest. Think of it as the snowball effect—small contributions now can turn into a hefty sum over time.
Mitigate Financial Risks: Long-term planning helps you prepare for life’s curveballs, whether it's an economic downturn or unexpected health issues. This reduces the risk of financial stress in the future.
Achieve Financial Independence: Imagine reaching a point where your money works for you, not the other way around. With careful planning, you can enjoy life on your own terms—whether that means retiring early or pursuing your passions.
Planning For Retirement
For many young people, retirement can seem like a lifetime away, but it’s never too early to start planning.
It’s not just about putting money aside; it’s about being smart with your finances now to set yourself up for a stress-free future.
By starting early, you give your savings more time to grow, which means you’ll have more freedom to enjoy life on your terms when the time comes.
Estimating Your Retirement Needs
Let’s break it down:
Determine Your Desired Lifestyle: What does your ideal retirement look like? Are you planning to travel, or do you see yourself living a quieter life in the countryside? Your lifestyle choices will heavily influence your retirement needs.
The cost of living is rising steadily, and by the time you reach retirement in 40 years, the expenses could be significant.
"Those in their 20s could need around £1.1 million to achieve a comfortable retirement in 40 years’ time, assuming 2% inflation." Interactive Investor
This might sound overwhelming, but it underscores the importance of taking control of your finances now.
As a student or young professional, starting to save and invest early is key to securing a happy and comfortable retirement.
By making smart financial decisions today, you’re setting yourself up for a future where you can enjoy life without financial worries.
How Much Should You Save
Here’s where it gets real. A common rule of thumb in the UK is to save 10% to 15% of your income into a pension or other retirement savings account, like a workplace pension, SIPP, or ISA.
But how do you know if that’s enough?
Let’s keep it simple:
Estimate Your Desired Annual Living Expenses During Retirement: Think about how much you’ll need each year to live comfortably. Include housing, utilities, food, travel, and any healthcare costs. Click here to find out more!
Subtract Expected Income: Take into account your State Pension, workplace pensions, and any other income sources. For instance, the UK State Pension currently pays a maximum of around £11,500 per year (if you qualify for the full amount).
Calculate the Gap: The difference between your expected living expenses and your income sources is what your investments need to cover.
Multiply by 25: This gives you a rough estimate of how much you’ll need to have saved by retirement, assuming a 4% withdrawal rate.
For example, if you need £40,000 a year and expect £10,000 from pensions, you’ll need to cover £30,000 with savings. Multiply £30,000 by 25, and you’ll need about £750,000.
Maximising Retirement Savings
Now that you know what you need, here’s how to get there:
Take Full Advantage of Employer Contributions: If your employer offers a workplace pension match, contribute enough to get the full match. It’s free money and can significantly boost your retirement savings—don’t leave it on the table!
Start Early: The earlier you start, the more time your investments have to grow. Even if you’re just starting your career, it’s worth contributing to your pension. Small steps now can lead to big leaps later.
Diversify Your Investments: Don’t put all your eggs in one basket. Spread your pension investments across different assets like stocks, bonds, and property to balance risk and reward. This strategy helps your portfolio weather market fluctuations.
Building Wealth Beyond Retirement
Retirement isn’t the only long-term goal worth pursuing. Here are a few more:
Homeownership
Buying a home is a major milestone and a common long-term goal for many young professionals. Here’s what to consider:
Save for a Down Payment: Aim to save at least 20% of the home’s purchase price to avoid private mortgage insurance (PMI) and reduce your loan amount.
Research Mortgage Options: There are different types of mortgages available in the UK. Understanding these options will help you choose one that fits your financial situation.
Plan for Additional Costs: Don’t forget about council tax, home insurance, maintenance, and potential renovations. Owning a home is rewarding but comes with hidden costs.
Investing in Education and Career Growth
Investing in your education and career can have long-term benefits. Whether it’s an advanced degree or specialized training, here’s how to approach it:
Estimate Costs: Research the total cost of your program, including tuition, materials, and any time away from work.
Explore Funding Options: Explore scholarships, grants, employer-sponsored schemes, or low-interest student loans. Free funding is always better than borrowing!
Calculate the Return on Investment (ROI): Consider how this investment will impact your salary and career opportunities. Make sure it’s worth it.
Achieving Financial Independence
Financial independence means having enough savings and investments to cover your living expenses without relying on a traditional job. To get there:
Save Aggressively: Aim to save and invest a significant portion of your income. The more you save, the sooner you can achieve financial independence.
Invest Wisely: Focus on low-cost index funds, real estate, or other investments that offer steady, long-term returns. Consistency is key.
Reduce Expenses: The less you spend, the less you need to save. Look for ways to cut unnecessary costs and live a simpler lifestyle. It’s not about deprivation; it’s about prioritising what truly matters.
Pouch's Final Thoughts
Setting long-term financial goals isn’t just about planning for retirement—it’s about creating a future where you can live comfortably, pursue your passions, and achieve financial independence.
By starting early and staying disciplined, you can turn your long-term goals into reality.
And remember, we’re here to help. Whether you’re just getting started or need advice on how to optimise your savings, Pouch has you covered!!
