According to the Office for National Statistics (ONS), the average retired household now spends £21,770 a year. To purchase an annuity in retirement that pays out that sum on a yearly basis, a significant amount of capital is required. However despite constant warnings from financial experts that we need to be saving more, many people are still not putting away enough to be able to afford a comfortable retirement.
With smart planning, living comfortably in retirement is definitely achievable, no matter what your salary. Here are some tips to make it happen.
Start saving early
According to a recent BBC article, an individual needs to put away £246 per month, after tax, from the age of 25 to be able to purchase an annuity in retirement that will pay out £20,000 per year. If the individual delays saving until 35, the required monthly contribution grows to £404, and if the individual only starts saving at age 45, the required monthly contribution rises to a hefty £826 per month. Similarly, to purchase an annuity in retirement that pays out £30,000 per year, an individual would have to save £342 per month from age 25, £553 from 35 or £1,160 from 45.
There's a clear lesson here. The earlier you start saving, the easier it is to build long-term wealth. So if you haven't started saving for retirement yet, get started as soon as possible.
Equities for long term wealth
When it comes to asset classes that are suited to long term investing, it's hard to look past equities. While the share market is no doubt volatile in the short term, over the long term it has proven to be an excellent wealth generator. Indeed, according to the annual Barclays Equity-Gilt Study, over the past 50 years the stock market has yielded an after-inflation total return of 5.6% per year, comfortably beating the return from gilts and cash.
If investing in individual companies seems too daunting, consider investing though low-cost investment funds or exchange traded funds (ETFs). This way you can still gain exposure to equities without having to worry about buying and selling individual companies.
Reduce taxes and fees
When investing for the long term, it's essential to not only focus on achieving high returns, but also on minimising taxes and fees, as these can significantly erode your capital. For tax minimisation, a Stocks and Shares ISA is a good place for UK investors to start, as capital gains and income are tax-free within these investment vehicles. Every adult has a £15,240 allowance for the 2016/2017 financial year, so if you haven't set one up already, now could be an excellent time to do so with the end of the financial year on the horizon.
Lastly, don't be afraid to seek professional advice about your retirement planning. It's amazing how many people are happy to see a doctor in relation to their health, or a mechanic about their car, yet when it comes to paying for financial advice, they shirk it. The key to a successful retirement is planning, so don't ignore it, and be willing to consult an expert if you need assistance.
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