I find it fascinating talking to (and, more importantly, listening to) people regarding their approach to finance.
Most go through some kind of financial awakening, when they realise they too will grow old and need to think about their retirement. When it happens varies a lot, and I think for most people (at least, in my experience), it seems to be some time between the ages of 30 and 50. When did my eyes open? Can’t remember. Wish it had been earlier.
Starting late
What if you’ve reached 50 and you’ve got nothing saved towards a comfy old age? Well, around a third of all adults in the UK have less than £1,500 in savings, so you’re in good company. But the first thing to do is rather something not to do, panic — there’s no need for it.
Even if you’re only just starting at age 50, you really can still make a significant difference to the amount you could have to live on in retirement, though you might have to make a few tough choices.
But first, what level of saving would you need to, say, double your State Pension? We need to decide on the best way to save and invest for the maximum likely returns, and for me, that’s going for shares in top UK companies, in either a SIPP or an ISA (which offer complementary tax benefits).
Which ISA?
Despite their popularity, I would never go for a Cash ISA, not when top interest rates only manage around 1.45% — which is guaranteed to lose you money after inflation. But investing in UK shares, according to a Barclays survey, has returned an average of 4.9% per year for more than a century — above inflation. It’s a Stocks and Shares ISA for me.
At the moment, the full State Pension is paying £8,767 per year, and (according to the current rules) should at least keep up with inflation. So what will you need to generate an additional inflation-adjusted £8,767 per year from shares? At the same 4.9%, you’d need a pot worth approximately £179,000.
How much would you need to stash away per month to achieve that? My calculations show you’d need to invest around £450 per month, assuming the same inflation-plus 4.9% return. And here’s where the tough choices cut in — if you’re currently saving nothing, that could be a daunting amount. Oh, and it would take 20 years at that rate, so you’d need to keep working until you’re 70 (assuming you’re 50 now).
Achievable
But to put the amount into perspective, the average UK take-home pay came to approximately £2,500 per month in 2018, and that £450 is less than a fifth of that. If you work it out as a percentage of your own pay, it might not seem so big a hurdle.
And if you think seriously about money you spend that you really could cut back on, it could soon start to look quite achievable. I know people who have several coffees a day at around £2.50 each, and think nothing of spending £40 or £50 on a night out at the weekend. Just those two specifics could easily cost around £300 per month, and I’d much rather be putting that much into my ISA or SIPP.
