Are you sleepwalking your way to poverty?

At first glance, the capital required to fund a comfortable retirement can look out of reach. But run the figures, and the goal looks more attainable.

Tired woman sleeping on London underground

Image source: Getty Images

“They say that hard work never killed anyone — but I figure, why take the chance?”

Former American president Ronald Reagan’s comment, back in the 1980s, still brings a smile to my lips. Reagan, it must be said, wasn’t known for being particularly industrious, but he certainly had a talent for folksy self-deprecation.

The trouble is, Reagan’s wry words also sum up many people’s attitude to investing. Again and again, excuses are found not to anything about it — until, sadly, it’s all too late.
People’s thirties drift by, and then their forties — and all of a sudden retirement is on the horizon, and the job market, they suddenly find, isn’t as kind to fifty-somethings as it was to thirty-somethings.

What a comfortable retirement looks like

You probably haven’t heard of industry body The Pensions and Lifetime Savings Association: and frankly, unless you’re in the investment industry, there’s no reason for you to.

But this summer, they’ve put out some very interesting projections, based on independent research by Loughborough University. Basically, what they’ve done is some very detailed lifestyle analysis, in order to build up three retirement projections: a ‘minimum’ level of retirement income (including state and other pensions), a ‘moderate’ level of retirement income, and a ‘comfortable’ level of retirement income.

The minimum level of retirement income works out at £10,900 (£16,700 for a couple); the moderate level works out at £20,800 (£30,600 for a couple); and the comfortable level works out at £33,600 (£49,700 for a couple).

And, to stress, these aren’t just ‘fingers in the air’ figures, as such estimates often are: each figure is backed up by a detailed set of assumptions and costings regarding the associated standard of living.

How do you fund it?

Let’s take that comfortable standard of living, for which a single person would need £33,600 a year.

What level of assets might deliver that?

Fund supermarket Fidelity reckons £840,000 — which equates to either a natural yield of 4%, or a safe withdrawal rate of 4%. Looking at my own investments, which tend to be quite income-centric, 4.5% is a figure that I conservatively use as an upper limit in my own calculations, but 4% sounds about right as an average.

Now, if you’re one of those people who has put off thinking about retirement, you’re probably thinking that £840,000 as a savings or investment pension ‘pot’ is wildly unattainable.

Hold on, though. If you knock off the income from the state pension, and the required pension pot drops to around £600,000, using that same 4% figure. Knock off some help from some kind of personal or workplace pension — let’s say a projected pension income of £10,000 — and it drops to around £350,000.

Growth projections

Now, £350,000 is a lot of money. But it’s not completely unattainable. And even making progress towards it has a positive impact on your eventual standard of living.

50% of the way there, for instance, is £175,000 — and using that 4% figure, again, delivers a likely income of £7,000 a year.

Invest £250 a month, for 25 years, with dividends reinvested, and the result is £128,961 — and that figure takes no account of rising stock markets at all, simply assuming that stock markets stay flat, but that investments yield 4%, over the whole 25-year period.

Plug in a (conservative) 2% annual stock market growth rate on top, and the result is £174,115, a figure that’s almost at our £175,000. And of course, the reality could be 3% or 4% — or higher.

And in practice, too, it’s likely that if you can afford £250 a month at the start of those 25 years, you’ll be able to invest rather more as the years roll by, taking you even closer to that magic £350,000.

Make a start

You can play with such projections for hours, of course.
All of which will deliver not a single penny of income unless you actually make a start, begin investing, and work to hit whatever monthly investment amount that you’re targeting.

Which takes us back to Ronald Reagan’s words: it’s about making the effort, and sustaining it. And this, I know, can be difficult. Not least because there are so many other things on which to spend your money. Things that are, frankly, very likely to be much more enjoyable: fancy holidays, new kitchens, flash cars, pricey consumer electronics and so on.

And today, you might argue, isn’t the time to start. There’s a cost-of-living crisis, remember?

But remind yourself of what happened to many people’s savings in lockdown: with far fewer things on which to spend money, the figures show that personal savings rocketed.

Just imagine that you can’t spend it. Not that you don’t want to spend it.

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 considered so you should consider taking independent financial advice.

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