According to recent research from insurance group Aegon, individuals in the UK now require savings of around £300,000 by the time they retire in order to be able to live a comfortable lifestyle in their later years. Aegon says that this figure will provide an income of around £18,000 per year, which along with the State Pension (£8,767 per year if you qualify for the full amount), should be enough money to live comfortably.
However, the problem is that a lot of people in the UK who are approaching retirement have nowhere near that kind of money saved up. For example, another study by Aegon found that the average 55-year-old Briton has retirement savings of just £105,000, while a study by Skipton Building Society found that one in 10 UK adults over the age of 55 doesn’t have anything saved at all for retirement. Clearly, there’s a huge retirement savings gap in the UK.
How to save £300,000
Building up a savings pot of £300,000 for retirement may sound challenging. However, if you plan ahead and start saving early, it’s certainly an achievable goal. In fact, due to the power of compounding (earning interest on your interest), a £300,000 portfolio could actually be achieved with savings of just £300 per month. Let me show you how.
£300 per month
£300 saved per month equates to savings of £3,600 per year. Now, according to my calculations, if you were to save £3,600 per year and you earned an 8% return on your money every year, your money would grow to £300,000 in around 27 years. In other words, if you began saving £300 per month in your late 30s, by the time you reached the age of 65, your savings could be worth £300,000 (note that this calculation ignores inflation). This shows you the power of compounding. Over a long-term investment horizon, compounding can turn a little bit of money into quite a large amount of money.
How to earn 8% on your money
Now, I know what you’re going to ask here. How can you achieve a return of 8% on your money when savings accounts only pay 1%?
The answer to this question is quite simple. To grow your money at that rate, you’ll need to consider investing in growth assets such as shares and investment funds. These kinds of assets are riskier than cash savings because it’s possible to lose money, however, the upside is that they tend to generate much higher returns than cash over the long run (around 6%-10% per year over the long term). As a result, these assets can help you grow your wealth substantially over time. The key is to construct a diversified portfolio that includes exposure to a range of different growth assets such as UK shares, international shares, and property investments. This will minimise your risk and give you a good chance of generating a healthy return over time.
The takeaway here is that saving up £300,000 for retirement is certainly an achievable goal. With the right investments, £300 per month might be all you need.
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Motley Fool UK 2019