If you’re worried about how you’ll live when you retire, you’re not alone. Many Brits don’t have any pension planning in place, and face the risk of not being able to retire at all.
The good news is that there are steps you can take to maximise your savings today and boost your chances of enjoying a comfortable retirement. Here’s how I’d get started.
1: Stop the leaks
Think of your finances as being like water in a bucket. If the bucket leaked, you’d fix it before you tried to fill it.
When it comes to money, there are two types of leakage. The first is wasteful spending. But the second is even worse — high-interest debt. Credit cards, store cards and payment plans are all example of high-cost debt.
Many popular credit cards and store cards charge interest rates of 20% or more. That means £20 added to every £100 you spend, every year. Paying high rates of interest sucks up your spare cash and leaves you unable to build your own savings.
Before you think about investing, I believe you should focus all your efforts on repaying debt. Start with the highest interest rate debt first, and work down (mortgage debt is okay, just make sure you can afford the payments).
2: Dealing with the unexpected
Over the last few years, numerous surveys have found that many of us would struggle to deal with an unexpected bill of perhaps £250.
Unfortunately, unexpected costs such as boiler repairs and car breakdowns are a fact of life. That’s why I believe that having a rainy-day fund is one of the most important financial goals you can have.
Being able to pay bills from your cash savings means you can avoid using costly credit card debt or payday loans. As we’ve already seen, high-interest debt is your enemy if you’re trying to save for retirement.
I’d aim to save at least three months’ living expenses in cash, before starting to invest for retirement.
3: Planning for the future
Hopefully by this point, you’ve cut down on financial leakage and built a cash fund to protect you from life’s unexpected events. Now it’s time to start thinking about the future.
According to research by Barclays, the UK stock market returned an average of 8.9% per year between 1899 and 2016. For cash, the figure was just 4.7%. This is one of the reasons why here at the Motley Fool, we believe the stock market is one of the best ways to build long-term wealth.
Investing in stocks and shares doesn’t have to mean taking big risks. In my view, the cheapest and safest way to get started is to make automatic monthly payments into a FTSE 100 index-tracking fund. To avoid any future tax bills, I’d suggest putting this in a tax-free Stocks and Shares ISA.
The FTSE 100 offers a dividend yield of 4.4% at the time of writing. This can be automatically reinvested into your account to boost your future returns. Over the long-term, history suggests the FTSE will gradually rise.
By investing in this way, I believe you have a good chance of building up a useful nest egg to help fund your retirement.
