If you are planning to retire on the basic State Pension alone, and I don’t recommend it, you will have to get used to living on income of just £8,546 a year. Happily, many people have some form of company pension as well, but to really retire in comfort and ease, you also need to save under your own steam.
Set your target
By planning ahead and setting money aside every month, you could add another £15,000 to your annual retirement income, but will need to build a pension pot of around £300,000 to do it.
That sounds a lot, but the younger you are, the easier it will be as your investments have much longer to grow in value. If setting money aside for more than five years you should shun cash and favour shares. Stock markets can be volatile in the short run, but should beat most other investments over longer periods.
Income for life
Currently, somebody with a £300,000 pension pot could buy a single level annuity paying an income of £16,269 a year from age 65. If they waited until age 70 this would rise to £18,414, because their life expectancy would be shorter.
You would get less if you bought a joint life annuity that paid 50% income to a partner after you died, and a lower initial income if you bought an inflation-linked annuity where your income rises by, say, 3% every year for the rest of your life.
Admittedly, fewer people buy annuities these days, but they still make a handy benchmark. So how do you save £300,000?
Start early
It depends on where you put your money and how well it grows, but one rule applies to all: the sooner you start, the better. So if you pay in £150 a month from age 25 and your investments grow at an average 6% a year after charges, you should have £295,286 by age 65. Wait another three years, to age 68, and they will have hit £357,764.
Not that many 25-year-olds can spare £150 a month for a personal pension, even if their contributions only cost £120 after 20% basic rate tax relief. However, it is worth investing even if you can only afford, say, £20 or £30 a month, as your early contributions have decades to grow in value.
Less taxing
If you start at age 35 you will need to pay in £300 a month (£240 after 20% tax relief) to hit £300,000 at 65, assuming the same 6% growth rate. If starting from scratch at age 45 this rises to a hefty £650 a month. Although if you are a higher rate 40% taxpayer by then, this falls to £390 after relief.
You must use your tax breaks to the full, whether saving in a personal pension or stocks and shares ISA, as that will make the task a lot less daunting. The next step is to decide where to put your money. Some people like to invest in funds, others want to build their own portfolio of stocks and shares. Either way, the Fool can help you hit your target. If you get into it, you could even save a million. Plenty of ordinary people have.
