Putting money aside for retirement is crucial for a comfortable long-term lifestyle. Besides providing ample financial flexibility, a large pension pot ensures sudden unexpected expenses can be easily covered. And yet, even after the recent interest rate hikes, putting money in a bog-standard savings account may not be the best idea.
While depositing funds in a bank is basically-risk free, the returns today are only around 3% to 4%. That’s obviously a lot higher than just a few years ago. But compared to the stock market’s average of about 10%, it’s a far cry from what can be potentially achieved. Even more so if an investor picks specific high-quality UK shares to pursue market-beating returns.
Saving versus investing
Let’s assume an individual has opened a high-interest savings account of 4% today, and this payout will remain fixed for the next 30 years. At the same time, another investor has built a balanced portfolio of UK shares that will match the stock market’s 10% return each year over the same period.
After injecting £500 each month, this 6% difference has an enormous impact. In fact, it translates into an extra gain for the investor of £783,219!
| Year(s) | Saving at 4% | Investing at 10% |
|---|---|---|
| 1 | £6,111 | £6,283 |
| 5 | £33,150 | £38,719 |
| 10 | £73,625 | £102,423 |
| 20 | £183,387 | £379,684 |
| 30 | £347,025 | £1,130,244 |
Retiring with a pension pot in the seven figures is far more exciting than having roughly a third of that. So, does this mean saving for retirement is pointless? Of course not.
Investing is never guaranteed, and the stock market has a habit of being volatile. Every once in a while, a crash or correction likes to come along to throw a spanner in the works. Depending on the timing of and reaction to these events, an investor could end up with significantly less than expected.
This is where having ample savings is advantageous. While the gains aren’t as impressive, the risk is far lower. Even if a bank were to go under, up to £85,000 of deposits per bank are protected by the FSCS.
That’s why I think the smartest move is to build up capital in the stock market but keep a sizable cash reserve in a high-yielding savings account. That way, when a crash inevitably comes along, an investor won’t be forced to sell fantastic UK shares at terrible prices to cover expenses.
Buying UK shares requires patience
Replicating the average returns of the British stock market is fairly straightforward, thanks to the invention of low-cost exchange-traded funds. But for those seeking even higher returns, stock picking becomes a must.
Of course, identifying top UK stocks to buy is far easier said than done. There are significant knowledge requirements for understanding regulatory filings, analysing financial statements, and executing detailed research. But more challengingly, stock pickers must have immense temperament and emotional discipline.
In the short term, share prices are driven almost entirely by mood and momentum. It’s only in the long run that valuations begin to reflect the quality of an underlying business. And that leaves plenty of time to second-guess and panic about an investment thesis. Nevertheless, investing in high-quality UK shares can pave the way to a far better retirement when approached in a disciplined manner.
