For many, saving for retirement might seem like a chore. Putting away a large chunk of your hard earned money today, in the hopes that you might be able to retire comfortably at some point in the future, does not look like an appealing trade, especially for those who’ve just entered the workforce.
However, saving does not have to be a chore. Today I’m going to explain how you can give yourself a comfortable retirement with just £10 a week and almost no effort on your part.
The most important tool investors have available to them when saving for the future is time. The sooner you start putting money away, the easier it will be, as the more time you will have for compound interest to work its magic.
Simply put, compound interest is the process of your money making money. Unlike simple interest, which is a set level of interest paid on a fixed principle (like a bond), with the compound variety, interest earned is added to the principle and you then earn interest on this bigger pot.
The difference in returns between compound and simple interest is staggering. For example, £1,000 invested in a 10-year bond paying 5% per annum will yield £1,500 over its lifetime. On the other hand, £1,000 invested in an asset that offers compound interest of 5% will grow to be worth £1,638.62 at the end of a decade — a difference of £138.62 or 9.3%.
Slow and steady
The sooner you start saving, the sooner compound interest starts to work its magic and by harnessing the power of compounding, you can retire comfortably by putting away just £10 a week.
The first step is to figure out how much you need to retire on. A simple rule gives us a rough figure. For this example, I’m going to use a rough number of £20,000 per annum to retire on — that’s excluding the State Pension. By multiplying this number by 25, it gives us a rough estimate of £500,000 needed to retire on.
According to my figures, to hit this level, a deposit of just £10 a week is needed (£520 annually). Keep this up for 45 years, and earn an average rate of interest of 10% and you could build a pension pot worth around half a million pounds.
Building your own strategy
These figures will vary from person to person, but I think they give a great example of how easy it is to fund your retirement with minimal effort, time and money.
By investing your money in a low-cost stock market tracker fund, tracking a well-known and diversified index such as the FTSE 250, you could easily earn a high single-digit per annum return on your money. All you need to do is save, buy and hold. It really is that simple.
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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.