Here at the Fool UK, we think it’s never too early to start planning for your eventual retirement. In reality, however, lots of people fail to take saving seriously until it’s too late (if at all), relying instead on the miserly State Pension — £8,767 per year for those that qualify to receive it — to get by in later life.
Even those who do have a pension pot may struggle. According to recent data from the Financial Conduct Authority, four in 10 of the 645,000 pots accessed in 2018/19 had a value of less than £10,000. With average life expectancy in the UK currently at 81, the thought of living on such a small amount of money for so long doesn’t sound like a happy retirement to me.
That’s why I’m looking at how making even small contributions in your third decade can be one of the best financial decisions you’ll ever make.
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It’s clearly a huge generalisation but entering your 30s tends to be associated with having greater responsibilities (mortgage, children et al) but also with having a little more disposable income as a result of career progression. It’s this extra bit of cash that could make a world of difference to your golden years.
Contributions don’t need to be huge. £100 invested every month in a Self Invested Personal Pension (SIPP) from the age of 30 could grow to almost £242,000 by the time someone is ready to retire at the age of 67, assuming a 7% annual rate of return is achieved from his/her investments and ignoring fees for now.
Unfortunately, the same monthly contribution doesn’t generate anywhere near the same amount of wealth if a person starts saving at the age of 40. Here, 27 years of compounding would leave you with just £112,000.
Begin saving at 50 and the outcome is even worse. With only 17 years left before needing to access the cash (compared to the 37 if you began investing at 30), saving £100 a month would leave you with just over £46,000.
Clearly, these calculations are purely hypothetical. Stock markets will likely boom, crash and move sideways over an investing lifetime. The amount a person can afford to tuck away might also rise or fall. Notwithstanding this, the numbers don’t lie.
But what should I invest in?
Investing for retirement can be as complicated as you want to make it. Those with an interest in the stock market and tracking their performance may want to put a majority of their money in individual company shares. Assuming this is the case, an equity portfolio that has exposure to promising smaller companies, as well as some reliable blue-chips, is probably appropriate if you’re in your 30s. The former’s share prices tend to be more volatile but their ability to grow revenue and profits at a fast clip can lead to far greater returns in the long run than if you just settled for firms in the FTSE 100.
If following your investments feels more akin to watching paint dry, however, there’s a far easier route. Those that merely want to earn the market return can put their cash in fully-diversified passive investments like exchange-traded funds. Not only have these been shown to consistently outperform funds managed by professional investors, they’re also far cheaper to own, thus ensuring that more of your money stays in your pocket to fund a happy retirement.
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Paul Summers has no position in any of the shares 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.