The optimism trap: why we delay saving for retirement and how to fix it

Do you overestimate the probability of your success? Chances are yes, because of what’s termed ‘optimism bias’. This bias refers to our tendency to overestimate our likelihood of experiencing positive events and underestimate our likelihood of experiencing negative events. It’s why we think we’ll be healthier, wealthier, and happier than the average person — even when the statistics suggest otherwise.

Of course, optimism isn’t inherently bad. Optimism encourages us to take risk or to persevere – even in the face of hardship or rejection. But it’s important to be aware of how our optimism can blind us to negative outcomes, particularly when it comes to long-term financial planning. Combined with decision fatigue, this can result in people postponing saving for retirement, only to find themselves financially unprepared and forced to work longer than expected.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Why people struggle to save for retirement

Most people understand the importance of saving for retirement. They aspire to build a secure future, but their good intentions don’t always translate into action.

One challenge is that retirement is a distant, abstract concept. Unlike saving for a house deposit or a child’s education, both goals with tangible timelines and outcomes, retirement lacks a clear target. Although we understand that people generally retire in their 60s, the reality is more complicated. Firstly, people are living for longer. This can make it difficult to understand just how much you need for retirement.

Additionally, everyone’s retirement looks different. Some retirees splurge on travel and hobbies, making up for decades spent behind a desk, while others downsize and find their costs significantly decrease. With so much uncertainty, defining a “magic number” for retirement savings is more challenging.

This uncertainty makes retirement savings an easy target for procrastination. When faced with immediate financial demands and rising cost of living, it’s tempting to put off long-term saving. The result? Retirement planning gets pushed further down the list, often until it’s too late to make up for lost time.

How much should you save?

One common approach to budgeting is the 50-30-20 rule: allocate 50% of income to essentials (rent, mortgage, bills), 30% to discretionary spending (dining out, entertainment), and 20% to savings. Even small, consistent contributions can make a significant difference over time.

But how much is enough? Financial experts recommend having at least three months’ worth of living expenses saved in an easily accessible account. This acts as a financial safety net for unexpected expenses, like a broken car or a surprise bill.

To give a sense of scale, the Pensions and Lifetime Savings Associations publishes annual estimates for ‘retirement living standards’ at three levels of income: ‘minimum,’ ‘moderate,’ and ‘comfortable.’ Their estimates for 2024 found that a single retiree would need a minimum annual income of £14,400, rising to £31,300 and £43,100 respectively for the moderate and comfortable retirement lifestyle*. These numbers are higher for couples in retirement*.

Given today’s life expectancy, a 65-year-old man in England can expect to live until nearly 84, while a woman can expect to reach 86. That means an average retirement of 19 to 21 years. Using the moderate income level, a man would need around £594,700 saved, while a woman would need £657,300*. For a couple wanting a comfortable retirement over 20 years, that figure rises to approximately £1.2 million*.

Getting started with investments

The good news is there’s no shortage of investment funds. The ideal solution will depend on your requirements and attitude to risk.

With bonds yielding attractive returns once more, we’d look to the likes of a strategic bond like Aegon Strategic Bond and Jupiter Monthly Income Bond. Both funds are first quartile over one, five and ten years, with the Jupiter fund currently offering a yield of 6.97%**.

Assuming your investment would need to last two decades, an element of growth will be essential. For this we’d look to a global equities fund such as IFSL Evenlode Global Equity. This fund focuses on ‘quality’ companies that can achieve sustainable growth over time while minimising the need for additional capital reinvestment. Those preferring to invest closer to home might consider the Artemis Income fund, a high-conviction portfolio of UK stocks, targeting a rising income and capital gain.

If you’re looking for something a little different, the VT Gravis UK Infrastructure Income fund could fit the bill. The fund may be of particular interest to income investors, as it offers an interesting alternative to the standard equity income or bond funds, with a current yield of 6.35%**.

Those looking for a multi-asset solution might consider the VT Chelsea Managed Monthly Income fund. The monthly income fund targets an above-market income that is sustainable and consistent and is currently yielding 5.99%***. The fund aims to pay roughly the same amount of income each month so that you can budget with confidence.

The bottom line

Retirement may seem distant, but the sooner you start saving and investing, the more control you’ll have over your future. While optimism is a great motivator, relying too much on the assumption that “it’ll all work out” can be risky. Instead, start taking a few proactive steps today, whether through regular savings, investing, or simply setting a clear goal. All of these actions can help ensure a financially secure and fulfilling retirement.

*Source: Retirement Livings Standards, 2025
**Source: FE Analytics, at 18 March 2025
***Indicated yields are correct as at end of Nov 2024.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.