By Daniel Hough

Inflation may have begun to ease, but it still remains very high by the standards of the past 15 years.

The cost of living remains firmly front of mind for many people, but what is happening now will also have a much bigger knock-on effect further down the line – something people should try to bear in mind when planning for retirement.

For instance, our Pension Barometer from earlier this year showed that in March a 67-year-old-retiree with a full state pension would need a pot of £630,000 to provide themselves with a ‘comfortable’ retirement income of £37,300 per annum – as defined by the Pension and Lifetime Savings Association. That figure represents a £90,000 increase on just 12 months ago, largely because of inflation.

At a time when household finances are already stretched, it can be tough to put money away for retirement. But, as the difference a 12-month spike in inflation demonstrates, the effects of compounding over time can be huge – particularly if you are looking at decades.

A common rule used to determine how much you should pay into your pension is taking the age you begin, halving it, and make that your contribution. So, for instance, if you begin at 25 years-old you would pay 12.5% of your salary in each month.

Our analysis, with some reasonable assumptions around growth and costs, suggests that someone leaving university at 22 years-old contributing 11% of their salary would amass a retirement fund of £450,658.

But, following the same rule, a person who does not begin saving for retirement until they are 40 years-old would have substantially less, accruing a pot of £350,512.

A large part of the difference is time and compounding. There are various adages about the effects of compound interest – Einstein referred to it as ‘the eighth wonder of the world’ and among legendary investor Warren Buffet’s many quips was his now immutable saying ‘it’s time in the market, not timing the market’ that counts.

However, it is worth pointing out that even these figures are nowhere near the £630,000 required this year to provide a comfortable retirement income.

It may seem like a daunting feat but, broadly speaking, the more time you give yourself, the less of a strain on your day-to-day finances saving for retirement should be.

Some people have taken these lessons on board and truly run with them. Among pension data we obtained from the Office for National Statistics, we found that more than one million people in the UK had accrued pension pots of over £1 million last year. The country’s largest pension stood at a staggering £11m.

That is obviously an extreme. Our calculations show that an 18 year-old entering the workforce today would have to invest £49,260 annually, including tax relief and assuming average annualised returns of 5%, to accumulate an £11m pot by the age of 68.

More realistic than you might think is reaching a £1m pension pot. To do that by the age of 68, you would need to save £389 per month from 18 years-old, again assuming growth of 5%. If you didn’t begin saving until you are 30, that figure just about doubles to £755 every month – underlining the difference 12 years can make at the beginning of a savings journey.

These figures may sound unachievable in the current environment. So, we would suggest putting away whatever you can afford to for the time being. Adages and sayings may provide a helpful steer, but there is no one-size-fits-all approach to retirement.

Everyone’s circumstances and financial objectives will be different.

Taking professional advice is the best way of making sure you have a plan for retirement and are making the necessary financial arrangements to achieve it.

Daniel Hough is a financial planner at wealth manager RBC Brewin Dolphin