Saving for retirement is something most people put off to the last minute, often as an afterthought. Trying to put money away today in the hopes you’ll have enough to retire on comfortably, at some point, seems like a waste of time and effort for many.
However, retirement saving doesn’t have to be a chore. In fact, you can retire quite comfortably just by saving a few pounds every week, as long as you start saving early on in your career.
Unfortunately, most savers make one fundamental mistake when saving for retirement, which can upset your retirement plans for good.
A big mistake
You might not believe it, but one of the biggest mistakes is… not taking enough risk. This may seem counterintuitive. After all, if you’re saving for the future, it seems sensible to take as little risk as possible and make sure you have enough money to retire when the time comes.
However, leaving all your money in cash is actually more risky than investing it. The reason why is, today, the rate of interest you’ll be able to receive on your cash savings is below the rate of inflation. Therefore, the purchasing power of your money will be eroded over time.
A strategy that’s too risk-averse also means you have to save more over the long term. Indeed, according to my calculations, a saver would have to contribute £400 a month, or £4,800 a year, to build a pension pot of £220,000 over three decades. That’s assuming an average annual interest rate of 2%, which is more than you would receive on most savings accounts today. This also assumes the government adds an additional 20% on any SIPP contributions to take the total yearly contribution up to £6,000.
By comparison, a saver who invests in a low-cost FTSE 100 tracker fund would need to deposit just £33.23 a week to build a pension pot of the same value over the same time frame, according to my numbers.
Easier to save
The reason why it’s so much easier to save for the future when you invest your money is because of the power of compound interest. Most cash savings accounts on the market today offer interest rates of 2%, or less. Meanwhile, over the past decade, the FTSE 100 has produced an average annual return for investors of 10%. This extra 8% a year makes all the difference.
So the biggest mistake you can make when saving for the future is being too cautious when it comes to choosing where you want to invest your money.
The good news is, there’s currently a range of potential investments and investment accounts you can use to make this process easier. And there’s no need to be held to ransom by the low-interest rates offered by the banks.
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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.