Saving for retirement can seem like a daunting challenge at first, but it really doesn’t have to be. In fact, according to my figures, you can retire with a million-pound pension pot in 20 years with relatively little effort. That’s as long as you have a strict savings plan in place, and invest your money sensibly. Today, I’m going to explain how you can reach this goal.
Making a million
The first step to take on the journey to a million is to figure out how much time you have left to save before retirement. To make things simple, I’m going to use a sample time period of two decades.
Now this isn’t a particularly helpful timeframe because the longer you have to save, the easier it will be. Two decades isn’t really that long in the grand scheme of things considering many retirees will have been saving for 30 or even 50 years before they decide to leave the job market.
However, I want to outline how easy it is to build a million-pound pension pot even if you started saving for retirement relatively late in life. That’s why I picked the 20-year time frame to base my calculations on.
How much do you need?
How much you need to save during this period really depends on how much risk you are willing to take with your money.
For someone who isn’t willing to take any risk at all, I estimate savings of £3,600 a month will be required to build a £1m pound pension pot over 20 years. That’s assuming this money is invested in a cash savings account returning 1.5% per annum.
The more risk you are willing to take, the easier will be to make a million. For example, you can buy relatively low-risk bond funds with yields in the 4.5-5.5% range (excluding costs). According to my calculations, at an average annual rate of 5.5% per annum, a saver would need to put away £2,300 a month to build a £1m pension over the space of two decades.
Moving up the risk scale, an investor saving £1,550 a month can build a one million pound pot in the space of two decades just by investing in a simple FTSE 250 tracker fund. Over the past 20 years, the FTSE 250 has produced an average annual return of around 9%, which is why it can help you meet your pensions target sooner.
More risk, faster returns
In my opinion, the FTSE 250 is probably the best way to grow your money over the long term. But if you’re willing to take more risk, then picking stocks can help you hit the £1m target even faster.
Indeed, some of the market’s top blue-chip stocks have yielded annual returns for investors of more than 11% over the past two decades. At this rate of return, an investor would have to put away just £1,200 a month to make a million within 20 years, although that’s excluding account fees, trading costs and inflation.
Still, this example shows just how easy it is to reach that goal if you have a structured savings plan in place. It’s exactly the strategy I’m following with my retirement fund.
Financial Independence, Retire Early – that must sound good to anyone. However, not everyone realises it’s a possibility! That’s why we at The Motley Fool put together an in-depth report written by top FIRE expert Mark Bishop. What’s more, it’s free for all to download and read – click here to receive your complimentary copy!
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.