BLOG: Try thinking of retirement as saving up for future holidays
The idea of putting some money aside for sun, sea and sangria is a lot more appealing than ‘saving for old age’, right? And that’s effectively what we are doing. We are putting off some spending today to be able to spend that money later in life.
Let’s assume you have 20 years in retirement. A great holiday would be two weeks long and, with no work to occupy our time, that’s 500+ holidays. And the good news is, not only are we living longer, but we’re also living healthier, more mobile lives for longer too.
But the bad news is that living longer also means we need our retirement money to last longer. With the demise of ‘final salary’ pension schemes and delays in the state pension age, more and more of the post-work financial burden is falling squarely on our own shoulders.
How much do I need to save?
The people at Fidelity have run the numbers and their research found that UK households that manage to save seven times their annual household income by the age of 68 should be able to retire and maintain a similar standard of living as in their working life.
While seven is the goal for those ready to retire at 68, there are a series of savings milestones along the way for those at younger ages. The analysis suggests UK households should aim to save at least one times their annual household income before tax by the age of 30, four times by the age of 50 and six times by the age of 60.
The same research suggests that savers should be putting away at least 13% of their pre-retirement annual income (before tax), each year, from the age of 25.
With so many other demands on our money – rent or mortgage, childcare, and the like – 13% can seem like a huge amount. But don’t forget, it’s more than likely you are already saving for your retirement, even if you don’t realise it.
Every employer in the UK must put eligible staff into a workplace pension and, importantly, pay into it on their behalf. It’s called ‘auto-enrolment’ and it doesn’t matter if you work full time or part time, as long as you are not already in a workplace pension scheme, you are at least 22 years old and below retirement age, and you earn more than £10,000 a year, you will be opted in – unless you opt out.
You contribute and your employer contributes. And, for many of those who are in formal employment, at least 8% of your target 13% could be taken care of. This leaves you with a 5% shortfall to make up yourself.
But where to invest?
If you’ve got a decade or more before you plan to retire, funds investing in the shares of companies offer the best potential returns. The price of shares can – and will – go down as well as up, but over time, they have proven to be more rewarding than cash.
For example, in the past twenty years, we have experienced three big stock market crashes: in 2000-2003, 2008-2009 and this year, 2020. Each time, the global stock market fell by 45%, 30% and 20% respectively. But over the whole 20 years, it went up 206%.
Putting this into pounds and pence, if you had invested £100 a month for the past 20 years or so from the turn of the millennium, you would have put away a total of £25,000 – but have a pot of money worth just over £70,000. The same amount saved in a cash account paying the Bank of England base rate would be worth just £28,707.
So, when it comes to choosing where to invest those all-important retirement savings, it’s perhaps an idea to start thinking about those holidays again.
The more adventurous – or those with more time on their side – might like to split their contributions between funds investing in far-flung parts of the world, like Asia and emerging markets, for example. Some funds you might like to consider in this area are Invesco Asian, Federated Hermes Global Emerging Markets SMID Equity or GQG Partners Emerging Market Equity.
Others might like to stay closer to home, investing in European, US or UK equities. Here, funds like Waverton European Capital Growth, AXA Framlington American Growth and Fidelity Special Values are all worth a look.
Juliet Schooling Latter is research director at FundCalibre