If you haven’t built much retirement savings by age 50, you can’t afford to waste anymore time. The basic State Pension is currently worth £8,767.20 a year, and you don’t want to live on just that.
Double your money
The sums you must save to catch up for those lost years can appear daunting, but don’t stick your head in the sand any longer. You can still build enough from the stock market to match what the state pays, effectively doubling your income. Here’s how I’d go about it.
The first question is how much do you need in your pension pot to generate £8,767 a year? If you plan to buy an annuity, my calculations suggest you’ll need around £175,000 by age 65, assuming you buy a level, single life annuity.
If you want to buy an annuity that rises by 3% a year to keep pace with rising prices, you’ll need £235,000, which will generate around £8,767.20 in the first year.
So what do you save?
Let’s stick with my original £175,000 figure. How much do you need to invest to build that sum in, say, 17 years (assuming you retire at 67)?
If the money you invest grows at an average rate of 7% a year on the stock market, you’ll need to invest £450 a month. That would give you £178,195 after 17 years.
Now £450 a month may sound daunting, but that’s the problem with leaving it so late to get started. If you can cut back on your everyday spending, it might be doable.
Fewer people now want to buy an annuity, which you won’t find surprising, given today’s low rates. The majority now prefer to leave their money invested in the stock market for further growth, and withdraw a percentage every year to fund their retirement spending.
Another attraction of this approach is that, unlike an annuity, you get to keep your capital.
The ‘safe withdrawal rate’, which means your pot should never deplete, is 4% a year. If you want to generate income of £8,767.20, you’ll require just over £219,000 in your pot. To achieve that from age 50, you have to up your savings to just over £550 a month.
Your choice of investments
The next question is where to invest the money? Some of you may want to build a portfolio of individual stocks and shares. If so, here are three stocks you could consider for a FTSE 100 starter portfolio.
A simpler alternative would be to take out a FTSE 100 tracker, such as the hugely popular exchange traded fund iShares Core FTSE 100 ETF. This has no initial fee and rock bottom charges of just 0.07% a year. You could combine it with a FTSE 250 tracker or, for greater diversification, a global ETF such as the Vanguard FTSE All-World UCITS ETF.
There’s little point putting your retirement savings in a Cash ISA, as you’ll struggle to generate more than 2% a year, which isn’t enough to build the pot you need at this stage.
With luck, you can double that State Pension, which would give you £17,534 a year. That isn’t spectacular, but it’s more than you’ll have if you do nothing.
