Saving for retirement can seem like a daunting prospect, but it doesn’t have to be. Neither do you have to set aside a significant amount of your income every year to build a large retirement pot.
Saving for retirement is easy if you know how, and you don’t have to be a City fund manager or skilled at stock market trading to be able to build your wealth.
Saving is critical
Everyone knows it is important to save for a rainy day, although for some, after paying all the monthly bills and unforeseen expenses, saving for the future may seem like an unrealistic expectation.
But it shouldn’t be. Saving is not a precise science with a one size fits all template that applies to everyone. You can only save as much of your personal circumstances dictate, which you may think is not enough but that couldn’t be further from the truth.
The later you start saving, the more you have to save to retire comfortably. The earlier you start saving, the easier comfortable retirement becomes, and there’s less strain placed on your monthly finances.
For example, let’s say you want to retire with a pension pot of £350,000 which will give you around £24,000 a year for 20 years after retirement including the state pension of a little more than £6,000 a year (not adjusted for future inflation). Assuming you invest your savings and achieve an annual return of 8% (4% per annum in dividends and 4% per annum and capital growth) you will need to save £22,000 per year if you start saving only ten years before retirement.
This goal is clearly unachievable to the majority of the UK population. However, if you plan ten years ahead and start saving 20 years before retirement, you will only need to save £7,000 or just under £600 a month to hit the £350,000 target. Start saving 30 years in advance, and the required monthly investment falls to £232. And if you start saving at age 20 to retire at 60 you will only need £100 a month to hit the £350,000 target. These figures make a vital point; if you want to build wealth, a rigourous long-term savings plan is required.
I’ve used the figure of £350,000 as a realistic example for most people, although if you want to reach the magical £1m mark, it’s not much harder. If you start saving at 20, to retire at 60, it will take £3,500 a year or £292 a month to hit this target.
Achieving the bet returns
The best way to make sure your money is working as hard as it can is to invest it in stocks, particularly proven dividend champions and blue-chip stocks, which offer attractive investment returns but at the same time minimise the risk of capital impairment.
Companies such as Legal & General, Royal Dutch Shell and GlaxoSmithKline are great examples. These shares will do all of the heavy lifting while all you have to do is sit back and make sure your savings account is funded every month.
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Rupert Hargreaves owns shares of GlaxoSmithKline and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.