When I was in my teens, being a millionaire was mostly a marker of wealth rather than a necessity in retirement.
However, as I age I realise that for most of us saving enough money to achieve the goal of a million pounds in retirement is becoming increasingly important.
How much to save each month
With the rising cost of living, longer life expectancies, and the growing number of years the average Brit will spend in retirement, each of us might actually need a million pounds to see us through our golden years comfortably.
The thought of saving a million pounds may sound daunting at first. But disciplined saving, smart investing, and the power of compound interest make it more achievable than most of us may have initially imagined.
For example, if we plan to retire in 30 years with a million pounds, simple arithmetics would say that we’d need to save at least £33,333 a year, or £2,777 a month.
Most of us might look at that number and feel overwhelmed! Thankfully, compound interest, which has a snowball effect on personal savings, may help us get to our destination more easily.
Long-term investing and the power of compounding
By investing the money we save, we can make use of the power of compounding to help us grow our money.
In the UK, interest rates in bank savings accounts are low, but that does not mean we can’t find investments that can help our money compound much faster.
There are many shares and REITS listed on the FTSE 100 or FTSE 250, averaging a sustainable annual dividend yield of about 5%. Any capital gains delivered by the stock would be an added bonus on top of the dividend.
If instead of putting our money in savings accounts, we invest in these shares or REITs each month, the amount we’d need to achieve a million pounds decreases dramatically.
To achieve a million pounds in 30 years, we need to invest about £1,250 each month (or £15,000) into a 5% yielding investment and continually reinvest the dividends.
And we would have slightly over £1 million at the end of 30 years.
The actual amount would depend on how many times we compound during the year and whether we invested at the start or the end of the month.
But, the message stays the same: the sooner we start to invest, the more money we are likely to have for retirement.
Several shares that pay robust dividends
For many investors, the quest for steady income is becoming more important than ever. At The Motley Fool, my colleagues provide detailed coverage of share investing and retirement planning. They discuss many shares with impressive dividend yields that pay between 4%-6% annually on average.
Some companies may pay even more, although it would be important to do due diligence on each of these companies to see if their dividend yields are sustainable over time. A high yield is sometimes a reflection of weak investor sentiment about the sector or a depressed share price.
At present, tobacco firm Imperial Brands and telecoms giant BT both currently offer a yield of about 9%. WPP, the multinational advertising group, and Royal Dutch Shell, the oil major, each have a dividend yield of over 6%. At the lower end, pharmaceutical giant AstraZeneca, whose share price has been on the rise in 2019, pays slightly over 3% in dividend yield.
