If you’re worried the State Pension will not be enough to sustain your current level of living in retirement, then now’s the time to take action. Here are the five moves I’m making right now to ensure that my pension pot is big enough to help me live comfortably after retirement.
The easiest way to make sure you’re entitled to the full State Pension is to top up your National Insurance (NI) contribution record. You’ll need at least 10 qualifying years on your NI record to get any new State Pension, and at least 35 years if you don’t have an insurance record before 6 April 2016.
It costs £780 to buy one year of contributions right now, a small outlay considering this could potentially translate into several thousand pounds worth of extra income in retirement.
My next step is to start saving more. Did you know that saving just £30 a week can dramatically increase the amount of money you have available to retire?
According to my calculations, if you put away just £30 every week, you could double your State Pension income if you start saving early enough and invest this money.
Saving might seem like a chore, but an outlay of just £130 a month is, in my opinion, worth the cost to secure your financial future.
My next tip is to invest your savings. With interest rates where they are today, it’s tough to build up a substantial pension pot, because most savings accounts don’t offer a rate of interest exceeding inflation.
By comparison, over the past few decades, the FTSE 100 has produced an average annual return for investors of around 9%. You don’t need to take on too much risk to be able to achieve this return either. All you need to do is buy a low-cost FTSE 100 tracker fund and let the market do the rest of the work.
Investing can turbocharge your pension returns. According to my calculations, £1,000 invested in an FTSE 100 tracker fund growing at an annual rate of 9% could be worth £2,367 after a decade. The same amount of money in a cash savings account, earning 1.5% per annum, would grow to be worth £1,160.
Another great way to boost your retirement savings is to take advantage of the tax benefits on offer from retirement savings products such as SIPPs and LISAs.
For basic rate taxpayers, the government will top-up any contribution into a SIPP with a cash bonus of 20%, meaning that for every £80 you deposit, the government will add £20.
LISAs offer a cash bonus of 25% on as much as £4,000 in savings every year, giving a potential cash bonus of £1,000 for doing virtually nothing.
My final tip to improve your finances in retirement is to reduce debt. Borrowing money, especially on high-interest credit cards, doesn’t make much sense if you’re trying to save for the future, or living on a set level of income.
A sudden rise in interest rates could quickly destabilise your carefully planned finances in retirement. So it’s best to make sure you don’t have any outstanding debt for the time you quit the workforce.
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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.