Saving for retirement can seem like a daunting process at first, but it really isn’t. As long as you have a regular savings plan in place, make sure you don’t dip into the pot, and invest your money, over time the market will do all of the hard work for you.
For example, if you save £100 a month for 40 years, and achieve an average annual return of 7%, at the end of the period you’ll end up with a final pot of £260,000 — not bad for little to no work.
Starting to save
The first stage of planning for retirement is to decide how much you want to retire with. You need to ask yourself what sort of quality of life do you want when you retire?
Most retirees spend approximately £30,000 per annum. This sum, which is just above the average full-time working income of £27,000, requires a total pension pot of around £350,000 or more to be able to be self-sufficient for a 20-year retirement.
Unfortunately, these figures are a bit unrealistic as they assume a perfect world scenario where the investor can achieve a 9% per annum return on their pension pot during retirement.
If you can achieve a 9% per annum return on your savings, then with a starting pension pot of £355,000 you can make your savings last forever, with no effort. For the past 100 years the leading US index, the S&P 500 has gained around 9% each year, although there have been many peaks and troughs along the way.
Building the pot
In reality, the returns you’re able to make on your savings are likely to be much lower than the example above because in retirement you will need to take less risk with your money.
And if you want to be able to retire with a savings pot that has an infinite lifespan, at today’s low-interest rates, you’re going to need to save a lot more before you give up work.
So, how much is enough? Well, according to my calculations, assuming you require an income of £30,000 annually, retire at 65, live to around 85, and achieve a return on your investments of 4% (a more realistic return in today’s environment, and one that requires almost no effort on your part), you’ll need to start with a savings pot of £550,000.
If you have time on your side, the good news is that reaching this level is not that hard. As you can take more risk when saving up for retirement than you can when actually retired, savings returns will likely be higher.
According to my figures, if you can achieve an average annual return of 7%, start saving at 26 and retire at 66, you need to save £439 a month to be able to retire with £550,000 giving you £30,000 per annum in retirement. All of these figures exclude inflation.
The bottom line
If you want to make your pension savings last a lifetime with little effort, you need to enter retirement with a pension pot with £550,00 rather than that £350,000 figure. With this savings reserve, you should be able to generate a steady income from a mix of bonds and shares that will last a lifetime. But remember to start as soon as possible. The monthly savings figures quoted here will rise for every year you delay.
Time to start saving?
Building a sizeable pension pot is easy if you know how and get started early.
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Rupert Hargreaves owns no share mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. 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.