FOOL'S EYE VIEW
How To Make £350,000

By Bruce Jackson (TMFGoogly)
April 23, 2002

Do you want to retire early? Enjoy the latter years of your life? Travel the world with the blue rinse brigade? Buy your dream retirement home in the south of France or on the Queensland coast? Sounds a great prospect, doesn't it?

Problem is that for most of us, me included, these are nothing but pipe dreams. Reality is that, through financial necessity, early retirement is not an option. Most men will simply have to retire at 65. It won't be until that age that they've earned enough money to enable them to live a simple life in retirement.

How much money do you need? Assuming retirement at 65 and death at 80 -- it's all rather macabre and clinical sounding I'm afraid -- each individual will need around about £350,000 in order to live a comfortable retirement.

Here's the maths. The average wage is just over £20,000 per year. In retirement, most people would love to earn the average wage per annum. At current rates, a 65 year old single male can expect an annuity income of about £6,000 per £100,000, meaning with £350,000 in your pension fund, you can expect an income of £21,000.

[Note: The options open to savers and retirees are complicated, far too complicated to list here. For the purposes of this article, though, let's work on the basis that you'll need about £350,000 in order to retire on the average wage.]

One Hell Of A Problem

£350,000 is a hell of a lot of money. How on earth are you going to be able to save that much, especially if you are already in your late 40s or older? I'm afraid to say that time in not on your side.

The simple table below should give you some idea of where you stand. Apart from your age, the potential rates of return (4%, 7% and 10%) obviously have a huge bearing on the monthly amounts you need to save in order to hit the elusive £350,000. More about the rates below.

Age                        25          38          45          55

Starting Lump Sum           0      10,000      20,000      50,000
Monthly savings (4%)*     300         556         839       1,875
Monthly savings (7%)*     141         310         534       1,463
Monthly savings (10%)*     63         143         298       1,094

* Amount to be saved each month in order to accumulate £350,000 by the age of 65.
Input your exact details into our compound interest calculator.

The average age of readers of the Motley Fool site is about 38. Average gross salary is about £30,000 per annum, or just over £22,000 per annum (£1,850) per month after tax and national insurance are deducted.

If you are an average Fool reader, in order to hit that elusive £350,000 by your 65th birthday, depending on your view of the expected future rates of return, you need to save between £143 and £556 per month. Now here's the scary part -- that's between 8% and 30% of your monthly take home income. At the top end at least, it doesn't leave much for the odd night out on the town, let alone the mortgage!

Here at The Motley Fool, we reckon you should aim to save 10% of your monthly salary. For the average Motley Fool reader, we might to revise that percentage somewhat higher!!

What Can You Do? 10 Top Tips

There are various options open to you.

1. Panic!
2. Borrow Marty McFly's DeLorean sports car and beam yourself back 30 years in time. But this time round, remember to save some money instead of blowing it all -- and more -- on sex, drugs, and rock & roll.
3. Ask your boss for a pay rise.
4. Plead with your boss for a pay rise. Get down on bended knees, tell him or her that at the rate they are paying you, you'll have to work until you are 105 years old before being able to afford to retire.
5. Beg for a pay rise. You're getting the gist of this now.
6. Enough is enough! Get a pay rise by changing jobs. If you are offered the job, ask for more money than the job is advertised at. They can only say no, and they are not going to withdraw the job offer.
7. Rich parents? You wish!
8. Throw your hands in the air and give up. Spend everything you've got, and more. Smoke more cigarettes and drink more booze. Aim to die bang on your 65th birthday.
9. Give up the fags and booze, and most other luxuries, and live on the state pension of about £75 per week.
10. Work your money harder.

Work Your Money Harder

Unfortunately the only real option for most of us is number 10, although number 6 is always a possibility. Let's concentrate on working your money harder.

Back to various expected rates of return. They weren't just plucked out of thin air.

4% per annum - This is the current base interest rate. After basic tax is deducted, this is about the best return you can get from a bank or building society. Safety factor: Extremely high.

7% per annum - A guesstimate of the expected rate of return from the stock market over the next 10 to 25 years. This is lower than the historical average, but inflation is much lower these days and anyway, my accountancy background always taught me to be conservative. Safety factor over 10 years or more: High.

10% per annum - By choosing your own shares, or funds, you may be able to beat the stock market average. In days gone by, 10% would have been seen as somewhat mediocre, but again with low inflation and throwing in my natural conservatism, 10% may be an attainable level of return. Safety factor over 10 years or more: Medium to low.

The choice is of course yours. But, as the table above showed, the extremely safe route of saving will require you to resort to using a couple of the more radical tips above in order to reach your £350,000 goal.

You can't put all your money into the general stock market, but you can put in a good chunk of your monthly savings. An ISA is a good tax-free saving vehicle, and many index tracking funds allow you to invest money monthly.

If you want to take your chances and try picking your own shares or funds, good luck! Get yourself a cheap broker and invest. But, make sure you don't take that particular plunge until you've been through the Fool's School at least 3 times, and read some of the horror stories about when things go awfully wrong. The last thing you want is a planned-for positive 10% return per annum turning into an actual 10% negative return per annum.

Top Tip Number 11

11. Save more money per month. Not a huge amount of fun, and means spending more than a few nights indoors every month, but ultimately should be financially rewarding.

The Bottom Line

How are you going to make £350,000? Unfortunately there are no easy options. Believe me - I wish there were. You either save more per month and/or you invest in higher risk but hopefully higher reward investment vehicles. I wish me luck, just as I wish you luck. 

Next: Your Guide to Pensions | Have your say on the Fool's Eye View discussion board