UK Markets closed

This one financial move could supercharge your retirement savings

Alan Oscroft
Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

I wrote recently of the importance of saving money to invest for your retirement, and every pound saved now and ploughed into shares of the UK’s top companies can make a significant difference to your financial comfort after you retire.

Biggest cost

But what of that biggest monthly expense for the majority of working people in this country, your home? Did you know that average mortgage payments in London consume close to 45% of disposable incomes, and that figure is around 40% across the southeast of England?

And while such huge chunks of people’s cash are earmarked for paying the mortgage, the proportion of income that is actually saved has plunged to under 5% as of the final quarter of 2018. You might be shocked to learn that around a third of people in the UK aged between 35 and 44 have less than £100 saved — and only around 75% of older folks in the 55 to 64 age bracket have more than that.

That’s no way to prepare for retirement.

Moving on up

Now, it’s nice to have a good home, but I know too many people who are slaves to their mortgage payments, even until really quite late in life. And I don’t see the point in that, especially when one alternative is to invest your cash for a wealthy old age.

I know many see houses as an investment, and Halifax’s house price index has shown a 40% rise over the past 10 years. But the FTSE 100 has gained 75% over the same period, and on top of that has been providing annual dividend returns of around 4% per year.

And that’s after a tough decade for shares, and against an outlook for a cooling period in house prices.

Invest the cash instead?

What would you be able to achieve by dropping your next house move and staying on the current rung of the property stepladder? If your newer and bigger mortgage was going to cost you, say, an extra £200 per month, suppose you invest that cash in FTSE 100 stocks instead. If you achieve an average 6% return per year (which I think is a realistic target) and reinvest all dividends, you could end up with more than £90,000 extra for your pension pot in 20 years.

And what about downsizing now?

Many people intend to do that once their kids have left home and they don’t need the space any more, but a good few find their attachments to their home are too strong to break and they stay put for a lot longer than they planned.

Downsizing

Yet I reckon there could easily be a £100,000 difference between a large family house and, say, a bungalow (just like in those TV ads with the poor old bloke constantly up and down the stairs). £100,000 invested in shares at that 6% return rate could grow into £320,000 in 20 years. And if you’d still been paying off your mortgage, you could add extra from that every month too.

Ace investor Warren Buffett has billions in stock investments, but he still lives in the house he bought in 1958 and which suits his needs. I think he’s got it the right way round.

More reading

Views expressed 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.

Motley Fool UK 2019