When it comes to saving for retirement, we all have good intentions. We put away a little every month, with the hopes of being able to achieve a comfortable old age.
However, figures show that a large percentage of future retirees are on track to leave the workforce without enough money to be able to live comfortably.
The figures I’m referring to have been put together by insurer Royal London. Earlier this year, the company published a study which claimed British people will need at least £260,000 to retire today without money worries. Meanwhile, LV=, the insurance and savings business, estimates the average pot of money held by 45 to 54 year-olds is just £71,340.
These figures really concern me because they indicate millions of people are set to receive a nasty surprise when they leave the workforce.
If you are like me, these figures will make you want to take actions to safeguard your own retirement. And I have three simple tips to help you do just that.
The first mistake people tend to make when saving for retirement is not getting started soon enough. You might think you don’t need to save for retirement until later in your career, but the earlier you get started, the better, because your money has more time to grow.
For example, £100 a month invested at a rate of 5% per annum for 50 years will grow to £258,000. Just 10 years less, and your £100 a month will only be worth £149,000 after 40 years of saving. Those first 10 years of saving could be the difference between a comfortable retirement and a nasty surprise.
A little help goes a long way
My second tip is to make the most of tax breaks and perks offered by the government to encourage people to save.
Interest earned on money held within ISAs and SIPPs is tax-free, and you don’t even need to declare money held within an ISA to the tax man.
What’s more, SIPP contributions are given basic rate tax relief at 20%, so for every £800 you put in, the taxman will add £200. Meanwhile, the taxman will add 25% to lifetime ISA (LISA) contributions up to £4,000, meaning you can claim £1,000 of free cash every year.
With potentially tens of thousands of pounds in free cash available over your lifetime, overlooking these savings perks could be a big mistake.
Invest your money
As my colleague, Edward Sheldon recently pointed out, a staggering 46% of the £585bn saved in ISAs across the UK, is held in cash. With the average interest rate on cash ISAs at less than 1% today, and inflation clocking in at 2.4%, it means these cash savings are losing purchasing power.
If you want to have a comfortable retirement, you need to get your savings working for you. The best way to do this is to invest your money.
Over the past decade, the FTSE 250 has produced an average annual return of approximately 9%, eclipsing the yield offered by most cash ISAs out there today. Investing is by far the best option for retirement savers.
For investors with a short time horizon this probably isn’t the best solution, but if you’re not planning to retire for several decades, you will almost certainly benefit from investing your retirement pot.
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Rupert Hargreaves owns no share mentioned. 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.