Over the past five years, multiple surveys and studies have shown that around 50% of all savers in the UK aren’t putting away enough for retirement.
It’s easy to see why savers have been skipping pension contributions in recent years. The cost of living has only increased while wages have stagnated and rock bottom interest rates are doing little to encourage any of us to store up enough for our future comfort.
Unfortunately, most won’t find out that they haven’t saved enough for retirement until they actually give up work, which could mean a nasty surprise down the road. And with the government’s finances under increasing strain, there’s no guarantee the state pension will remain as (relatively) lucrative as it has been for the past few decades. This could mean the removal of an important safety net that savers have been able to fall back on traditionally.
Time to start planning
Saving for retirement doesn’t have to be a time-consuming nor stressful process. Even rock bottom interest rates shouldn’t deter investors.
Historically, the stock market has returned between 6% and 9% on average per annum, and these returns are available with minimal effort.
A low-cost index tracker fund will replicate the FTSE 100’s movements for as little as 0.5% per annum in management fees, removing the excessive costs that come with a bespoke investment plan and also removing the stress of stock picking.
Above all, the easiest way to ensure you won’t run out of money in retirement is to start saving early and use the power of time and the magic of compounding to do all the heavy lifting.
For most 20-year-olds, the idea of saving for retirement may seem silly, after all with the government retirement age set at 65 and rising, you’ve still got at least 45 years to negotiate. But if you start saving at the young age of 20, you only need to save as little as £61 a month or £2 day (the price of a coffee) to reach a target of £1m by age 65. This calculation assumes the investor will achieve an average annual return of 12%, which seems high but isn’t entirely unachievable.
There are probably few 20-year-olds already saving for their retirement, but the above illustrates a key point. By sticking to a simple long-term savings plan, it’s easy to retire comfortably.
If you delay your pension saving to age 40, you will need to put aside £625 a month to reach the £1m by 65. And at age 50 you need to put aside £26,800 a year to reach the £1m target by 65.
The bottom line
Overall then, to avoid running out of money in retirement, a future around half of the UK’s working population is currently heading towards, you need to adopt a rigourous savings plan as early as possible. Doing so will make your life much easier. It will give you peace of mind that your retirement pot is growing steadily, and will cost much less overall.
Make money, not mistakes
A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions.
To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.
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.