Working out how much money you need to retire comfortably is not so straightforward as there are many variables to consider. For example, you need to consider your retirement age, life expectancy, income requirements, future investment returns, inflation rates, tax, and whether you qualify for a full State Pension payout.
As a ball-park figure, though, I’d say that you need a retirement pot of around £300,000 to live a comfortable retirement today. Assuming you withdrew 4% of your portfolio every year (this is the maximum amount that experts recommend withdrawing in order to ensure that your retirement pot lasts) and you also received full State Pension payouts, this would provide you with an income of nearly £21,000 per year (I’m ignoring tax to keeps things simple), which should be enough to provide for a ‘moderate’ lifestyle, according to the Pensions and Lifetime Savings Association.
With that in mind, let’s look at how to achieve a £300k retirement portfolio.
Start saving early
It goes without saying that the earlier you begin saving for retirement, the easier it is to build up a decent savings pot. Not only does a longer investment horizon give you more time to save, but it also gives you more time to take advantage of the power of compound interest.
Today, many people approaching retirement age have nowhere near £300k saved up. For example, according to research from Aegon, the average pension pot of those aged 55-65 in the UK is just £106,000. The chances are, many of those with smaller retirement pots left saving until the last minute.
Use the stock market to grow your money
Next, use the stock market to boost your retirement savings. While the stock market can be volatile in the short term, history shows that it has delivered excellent returns for investors over the long term. For example, the S&P 500 index has returned around 10% per year since 1926 – a far higher return than cash savings, term deposits, or bonds have generated.
As such, it makes sense to put your money into stocks if you’re saving for retirement and you have a long-term investment horizon.
Invest tax-efficiently and grab government bonuses
Finally, make sure you invest tax-efficiently and capitalise on bonuses that the government is handing out to those who save for retirement.
So, for example, consider saving into a Self-Invested Personal Pension (SIPP) account. This type of account comes with tax relief, meaning an £800 contribution is topped up to £1,000 for basic-rate taxpayers. If you’re under 40, another good option is the Lifetime ISA. This comes with 25% bonuses.
A £300k portfolio
Putting this all together, I calculate that if you started saving for retirement at 30, saved into a SIPP and picked up 20% tax relief on your contributions, and you generated a return of 8% per year through stocks (or around 5.5% above inflation), you’d only need to save around £200 per month to achieve a retirement portfolio of £300k (in today’s money) by age 65.
Even if you started saving at age 40, you’d still only need to put away around £365 per month to build up to £300k by 65.
Leave your retirement saving until 50 or later, however, and the process of building a £300k retirement pot becomes much harder.
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Motley Fool UK 2019
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