Saving for retirement can seem like a daunting prospect at first. I mean, where do you start? A quick search online for retirement savings tips will throw up millions of results, not all of which will be genuine.
Indeed, it’s estimated that in the first six months of this year alone, a total of £207.5m was stolen from almost 60,000 people via financial fraud, including pension scams.
The good news is, saving for retirement isn’t as challenging as it first appears. The first step for preparing for the future is to set out a road map of how much you will need to save to hit your retirement target.
Creating a roadmap
The roadmap should start with the level of income desired in retirement. Here, I’m going to target £10,000 which, when added to the State Pension, will give an annual income of around £19,000. According to a survey from Which? magazine, this is slightly above the level of income most retirees believe they will need to cover all essential costs in retirement.
To generate this level of income, a pension pot of £250,000 will be required at the time of retirement, based on my calculations.
The best way to hit the £250,000 target is to invest your money. If you do, you can get a return of up to 9% per annum on your money, 7.54% above the highest cash savings rate on the market today, although this isn’t guaranteed and will vary depending on the strategy used to invest.
For example, over the past decade, an FTSE 250 tracker fund has returned around 9% per annum. A FTSE 100 tracker fund, on the other hand, has produced a total return of about 7% per annum.
Assuming a retirement age of 65, my figures show a saver would need to put away £220 a month to be able to retire with a pension pot worth £250,000 if they started at 40 years of age. This is assuming the money is invested in the FTSE 250 and achieves an annual growth rate of 9%.
To hit the target in just 15 years, from a starting age of 50 and with a retirement target of 65, I calculate a saver would need to put away £650 a month. That’s again assuming a 9% annual return.
And finally, to hit the £250,000 benchmark from age 60, i.e. giving just five years of saving, it would take £3,500 a month, assuming that 9% annual return.
So, that’s how much you need to save for retirement by 40, 50 and 60. As the numbers above show, one of the greatest tools investors have when saving for the future is time.
The sooner you start saving, the better, as this allows the power of compound interest to work its magic. Investing is also essential if you want to make this target as you won’t be able to get the same kind returns with cash in today’s environment.
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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.