Our mid-40s is generally a good time to get serious about pension saving. At this stage of life, one is often earning good money and can save a considerable amount for the future. Meanwhile, any money saved now has plenty of time to grow before retirement.
Here, I’m going to discuss how I’d aim to build a £750,000 pension pot if I was starting at age 45. These are the moves I’d make now in an effort to build substantial savings for retirement.
The first thing I’d do in my quest to build long-term wealth is open a Self-Invested Personal Pension (SIPP) account, assuming I didn’t have one open already.
SIPPs have several advantages from a retirement saving perspective. For starters, they typically offer access to a broad range of investments including stocks, funds, investment trusts, and exchange-traded funds (ETFs).
Secondly, all investment gains and income generated within them are completely tax-free. Third, contributions come with tax relief. This means if a basic-rate taxpayer contributes £1,000 into their SIPP, the government adds another £250 on top. This is a great deal.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Next, I’d put a regular savings plan in place. Assuming I could generate an 8% return a year on my money over the long term, I calculate that if I was starting at 45, I’d need to save about £10,000 a year (£833 per month) to hit £750k by 67, or £12,000 per year (£1,000 per month) to hit my target by 65.
These calculations factor in basic-rate taxpayer tax relief of 20%.
Investing my money for growth
Finally, I’d put my money to work by investing it in the stock market. Over the long term, the stock market has been an amazing wealth generator, returning around 7-10% per year on average. So an annualised return of 8% should be achievable with a well-diversified portfolio.
Now I’d use a multi-pronged approach to build my investment portfolio. First, I’d build a solid base for my pension savings with some no-frills tracker funds. These provide broad exposure to the market at a very low cost.
Then I’d add in some top-performing actively-managed funds, such as Fundsmith Equity or Fidelity Global Technology, in an effort to enhance my returns.
Finally, I’d add in some individual stocks to customise my portfolio. By adding in some stocks with significant growth potential, I may be able to get to my savings goal faster.
For example, if I was to identify, and invest in, the next Tesla, I could see my returns increase significantly. Over the last five years, an investment in the electric vehicle producer has turned $10k into nearly $100k.
This is the beauty of investing in individual stocks. If we pick the right ones, the results can literally be life-changing.
Of course, there’s no guarantee this approach to investing would actually achieve a return of 8% a year. Stocks can be unpredictable at times.
However, history shows that when it comes to generating long-term wealth, there are few better asset classes.
So I’d be willing to take my chances on the stock market.