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equivalent to 80% of in-employment
salary although many will find that
40% of their final salary will see them
through three decades of retirement.
By way of an example, DIY investor
Magazine has created ‘Stuart’ who has
just crossed the big 4-0 threshold and
earns an annual salary of £70,000.
He plans to retire at aged 70 and is
looking forward to a relatively simple
life pepped up with an annual injection
of international travel. Stuart enjoys
good health and his family members
regularly bat well into the late-80s.
With the deeds to the house in the
safe, Stuart’s monthly outgoings will
reduce dramatically in retirement
although indulging his wanderlust
will add around £5,000 to his annual
outgoings.
Stuart, not unreasonably, believes that
he could live in relative comfort on
£35,000 per year – 50% of his current
salary, and expects to live for 20 years
in retirement.
In order to achieve that annual income
he would need to achieve a pension
pot in the region of £700,000 and
endeavour to invest in a way that
he can live off a combination of
withdrawals and interest.
£700,000 is by no means a small
amount of money and is put in context
by the fact that according to the
Association of British Insurers, the
average pension pot at retirement is
just £36,800.
Sadly, statistics show that those closer
to retirement faced with saving an
unrealistic proportion of their salary
just to achieve a miserable income in
retirement often do nothing at all.
However, by starting early and
planning well the DIY investors can
achieve the lifestyle in retirement they
want without living in penury along
the way.
In our example, if Stuart were to invest
10% (£7,000) of his current salary
into a moderate-risk portfolio (65%
equities, 35% bonds) for a period of 30
years until his target retirement at age
70, he has a good chance of achieving
the pension pot he targets.
To achieve this, Stuart would have
to save £580 a month and reinvest
any dividends; broken down thus the
figures seemmore achievable and
with the prize being the retirement he
wants, there is plenty of incentive for
him to be disciplined in its pursuit.
HOW CAN YOU GET THERE?
Reports of its death may be greatly
exaggerated, but the finite nature of
the State Pension is well documented;
however there are numerous tools
to help you invest your way to a
comfortable income in retirement.
The recent Taxation of Pensions Bill
puts flexible personal pensions firmly
centre stage - want to save £100 per
month in your pension?
Put in just £80 and the State will top
that up to £100 with another £20
(20% income tax relief).
Better still, if your company offers
to also contribute to your workplace
pension, that’s an offer of free money
that you shouldn’t refuse and if you are
a higher rate taxpayer you can claim
back additional contributions up to
your marginal rate.
One of the rules of investing for
retirement is to start early – Einstein’s
‘eighth wonder of the world’,
compound interest, means that your
retirement pension pot is more than
just the sum of your instalments: the
cumulative effect ensures that the
more years of interest you accrue, the
greater your overall returns.
