The rising cost of living is biting deep into people's pockets and causing many to rein-back their spending. However, saving for your future needs and wants is not the same as paying for your current needs and wants, because in this regard you may now have to do more not less.

Some 30% of Vanguard's UK clients have a regular direct debit with us and in recent months their number has been rising. The average amount they save each month is roughly £300.

Regular investing with a direct debit has two distinct yet related advantages. On the one hand, it helps to instill discipline because each monthly payment is no longer a conscious decision but something that happens automatically and out of sight. On the other hand, regular monthly investing enables investors to ride market cycles through 'pound-cost averaging' with each investment taking place at different prices, so that it all averages out and you have fewer worries about possibly mis-timing the market¹. 

But in the context of rising inflation are people putting away enough? This is because your investment goal - be it a comfortable retirement or a wedding - may turn out to be more expensive than you previously imagined if higher inflation is sustained.

Which leaves you with three broad choices: lower your sights with more modest goals, work longer, or stick with your current ambitions while raising your regular current contributions - if you are able to - so you can continue paying for them in future.

Wedding fund example

To illustrate what we mean, consider a simple example. Imagine a parent saving for their son or daughter's potential wedding. It may never happen but they want to be able to pay for it if it does and see that the average cost of a wedding is around £17,000². Assuming an average annual investment return of 5%, this would mean having to set aside £250 a month for five years.

However, after one year, seeing how the inflation wind is blowing, they decide, just to be safe, that £25,000 is probably a more credible target for their wedding fund. In any case, what isn't used could always make a nice wedding present, they think.

Under the same market conditions, how much would they need to save now to get to the revised total over the remaining four years? Answer: approximately £400 a month.

Retirement fund example

Here's another hypothetical example: a 54-year-old with ambitions to retire at 62 and pension savings of £200,000. By saving an additional £1,600 a month³ across their workplace pension and self-invested personal pension (SIPP), they figure they can broadly double this pot in the intervening period.

Having used the pension income calculator on the Vanguard website to steer them, they know that they are on course to receive a monthly retirement income of £1,010 - rising to £1,812 per month at aged 67, once the state pension kicks in - plus a tax-free lump-sum cash entitlement of just over £100,000.⁴

However, spooked by the rising cost of living, they decide it's not enough and would rather aim for double the retirement income. They figure that in terms of today's money, or once adjusted for inflation, it will be more like the kind of sum they will need to maintain their purchasing power.

That leaves them with two broad options, which is to either save more or retire later (or a combination of both). They could, for example:

• Continue to invest at the same monthly rate but put off retirement until they reach the age of 67 when our tool calculates they would have a combined monthly income of £2,159 as well as access to a tax-free lump sum of more than £135,000.
• Stick with their original plan and retire at 62 but increase what they put away each month to £3,000, and thereby start with a regular pension of £1,356 per month (plus whatever they want to add from the £135,639 tax-free cash they have available as a lump sum) that eventually rises to £2,159 per month as well once with the state pension kicks in.

We encourage you to use our pension income calculator to see where your own pension finances might be headed. Is your own pension planning still fit for purpose against a backdrop of rising inflation?

Regular reviews

Higher inflation helps to focus the mind not just on what things cost now but also on how much they could cost in the future. So it's a particularly opportune time to review your investment goals and weigh up whether or not you're still on target to reach those goals with the money you're putting away.

Of course, a regular review of your finances is smart whatever the weather. After all, you want to maximise your chances of investment success and getting to where you want to get to.

It's best practice for self-directed investors, not least when it comes to your regular monthly payments. So, given the inflationary circumstances, ask yourself: should I be increasing my ISA and/or SIPP direct debits?

 

¹ Not to be confused with the pound-cost averaging of a lump-sum of money, which can come at a cost. For more on the key differences read What is pound-cost averaging and how does it work?

² How much does an average wedding cost?, Money Helper, June 2021

³ Includes the basic rate tax relief earned on those contributions.

⁴ In our example we have assumed a 'medium' net annual investment growth rate of 5% but with the Vanguard pension income calculator you can adjust that.