Want to retire with £1 million? This is what I think you need to save each month

Roland Head explains how to save £1m — and why you probably won’t need to.

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It’s not easy to know how much money you’ll need to live on when you retire. But it’s probably a safe bet for most of us that a £1m pension pot would provide a comfortable income.

According to Hargreaves Lansdown, a best buy £100,000 single life annuity would provide an income of £5,442 per year for someone aged 65 today. My sums suggest that if your annuity was scaled up to £1m, then you’d be able to enjoy an annuity income of £54,420 per year.

That’s almost exactly twice the UK average disposable income of £27,300. I think it’s fair to say you could retire comfortably with £1m, but how would you need to save each month to hit this ambitious target?

Age isn’t just a number

Financial advisers use standard formulas to calculate how much you need to save each month to hit your retirement income target. I’ve used the same techniques to work out how much you might need to save each month to hit the magic million.

I’ve assumed you can earn a long-term average return on your investments of 7% each year, and that you plan to retire aged 65.

Age

How much to save each month

20

£272

30

£569

40

£1,254

50

£3,183

It probably won’t surprise you to see that the younger you are when you start, the easier saving £1m will be. When it comes to pensions, age isn’t just a number. The young really do have a big advantage.

Impossible, why bother?

The reality is that for many people, hitting these monthly savings targets just won’t be possible.

The good news is that I don’t think most of us will need this much. A savings pot of half this figure — £500k — would provide an annuity income of about £27k at today’s rates. Most people who’ve worked in the UK will also be entitled to a State Pension. This will give you up to £164.35 per week, or another £8,546 per year.

This is what I’d do

Retirement saving often seems an impossible challenge. It’s tempting not to bother. I took this view when I was in my 20s, but I wish I hadn’t now. I estimate that saving £100 per month from 25 would have given me a retirement pot of £255,228 at 65.

The reality is that anything you can save is worthwhile. And the younger you are, the easier it will be to build up a worthwhile retirement fund.

How can I get 7% per year?

I mentioned earlier that I was assuming a long-term average rate of return of 7% per year. With best buy cash ISA rates at 1.5%, you won’t get this kind of interest from cash savings.

However, 7% is a typical long-term average rate of return from the UK stock market. That’s why here at the Fool, we believe the stock market is the best way to build long-term wealth.

By ignoring short-term market movements and paying into a cheap FTSE 100 tracker fund every month, you should be able to harness the wealth-building power of the stock market. And remember, the sooner you start, the easier it will be.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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