Making a conscious decision to start saving for a pension is a daunting prospect, especially for the younger generation. How much should I save? Where should I put my money? And how will I afford it? All are valid concerns.
But the fact remains that saving for the future isn’t a hard task, especially when you have the key advantage of time on your hands.
Time to start saving
Last year JP Morgan Asset Management published a guide entitled the 2014 “Guide to Retirement”, within which they outlined the savings success of three fictional individuals.
The three individuals — Susan, Bill and Chris — were all saving for retirement. All three saved exactly $5,000 each year — roughly £3,248. The savings accounts they used returned 7% per annum, which is similar to the average annual total return of the stock market over the past 50 years.
The only variable in the study was time. Susan saved for 10 years from ages 25 to 35, Bill saved for 30 years from ages 35 to 65 and Chris saved for 40 years from ages 25 to 65.
At the retirement age of 65, Susan — who saved for only 10 years — had a pension pot of $602,070. Bill who saved for 30 years, but started later in life, ended up with only $540,741 in his pension pot.
Chris, who saved the longest, had a total pension pot of $1,142,811 when he came to retire at age 65.
The road to a million
£1,000,000 is truly the magic number, and if you want to retire a millionaire then it’s always best to get saving sooner rather than later.
Assuming a growth rate of 6% per annum, to have a pension pot worth £1m by the time you reach 65, you need to save £234 ever month — if you start at 20. If you start saving at 30, you’ll need to save £450 per month to reach a million by 65. And if you start saving at 40, you will need to put aside just under £1,000 a month to reach a million by 65, assuming a 6% per annum growth rate.
Still, no matter what age you start saving, if you’re going to invest in the stock market then you need to do your research. Shares that offer the perfect blend of both income and capital growth are usually the best.
But there are two problems with this approach. For example, many investors fall into the trap of seeking the highest yield on the market, without properly assessing whether or not it’s sustainable in the long term.
Other investors charge into stocks that appear to offer tremendous upside, with very little downside risk, only to lose everything when the company’s risky growth strategy fails to pay off. Ultimately, the investments you choose for your retirement portfolio depends on what type of investor you are.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.