MENU

My 3 tips to help you beat the State Pension

Retirees who reached the State Pension age after the 6th of April 2016 are entitled to receive a maximum weekly payout of £168.60, giving a total annual income of £8,767.20. However, the actual amount received will vary based on your National Insurance contribution record and several other factors.

Unfortunately, according to several studies and surveys, this isn’t enough for the average retiree who needs an annual income of between £10,000 and £25,000 to live comfortably. The exact figure depends on each retiree’s circumstances, such as whether or not they own a house and how many times they want to go on holiday every year.

With this being the case, I’m going to outline my three savings tips to help you beat the State Pension and retire comfortably.

Time is of the essence

My first tip is the start saving as soon as possible. Even if you can’t afford to save a lot every month, it’s vital that you start to put away as much as possible as soon as possible because time is the greatest tool investors and savers have available to them.

For example, a saver putting away just £100 a month at an interest rate of 5% will build a pension pot of £268,000 over 50 years, according to my calculations. However, if this saver doesn’t start saving until 25 years before retirement, they would have to put away four times as much every month to achieve the same result.

Put simply, the sooner you start saving, the more money you will have when you decide to retire.

Cash is not king

My second tip is to invest your money. I don’t think it’s unreasonable to say that most savers today are being swindled by low-interest rates. Most interest rates currently available don’t exceed inflation, which means savings are being eroded over time.

By comparison, even a simple investment in a low-cost FTSE 100 tracker fund would yield more than 4%, comfortably beating today’s inflation rate of 2%. What’s more, over the long term, stocks have provided vastly superior returns to other lower risk investments such as bonds and cash. The exact performance figures will vary from portfolio to portfolio but, as a rough guide, the FTSE 100 has outperformed UK government bonds by several percentage points per annum over the past few decades.

A few extra percentage points of returns might not seem like much but, over the long term, these additional profits add up. If the saver in the example above had invested their money in a low-cost stock market tracker fund, which went on to achieve annual returns of 8%, they would have ended their 50 years savings journey with a pension pot of nearly £800,000.

Risk, not reward

Investing is a great way to grow your money quickly, but it can also be disastrous if you make the wrong moves. That’s why my final tip to help you beat the State Pension is to focus on risk, not reward.

It’s imperative to make sure you don’t end up losing money taking on high-risk investments. Saving for retirement is a marathon, not a sprint, and in my opinion, the risk or capital loss isn’t worth taking for a few extra percentage points of performance.

A simple FTSE 100 or FTSE 250 tracker fund will provide you with steady returns without exposing you to excessive risk.

Financial Independence, Retire Early

If you’ve ever dreamt of retiring early, or if you’re already retired and protecting your financial independence is your aim, then this could be the report for you!

We at The Motley Fool are pleased to offer you “The Foolish Guide To Financial Independence And Retiring Early” completely free of charge – simply click here to receive these expert insights and strategies.

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.