In the UK, the average pension pot of an individual aged 55-64 is £105,496. While this may sound like a relatively healthy number at first glance, the reality is that it’s unlikely to provide a sufficient income through which to enjoy a comfortable lifestyle in older age.
In fact, assuming that 4% per annum is paid from the pension each year through retirement (which is a similar level to the FTSE 100’s current dividend yield), it works out as an annual income of £4,220. When combined with the state pension of £8,546, this gives a total annual income of £12,766.
Disappointing income
For many people, that may not sound like a sufficient amount to enjoy retirement. Certainly, it’s possible for an individual to live off that amount. With a lack of housing costs due to a mortgage having been paid off, incomes in older age do not necessarily need to match those earned during working life. However, for many people, retirement is a time to travel and enjoy the fruits of their labour over the previous 45-50 years. Therefore, obtaining a higher income in retirement is likely to be very desirable.
Investing for the future
Of course, it’s difficult to generate a larger pension pot by the time of retirement. Costs such as housing, family and various other expenses mean that even a decent salary does not necessarily provide a large amount to invest in the stock market each month. Furthermore, many people fail to invest in shares simply because they believe the process of doing so is difficult, or because the stock market is seen as being akin to gambling.
However, it’s easier than ever to invest for the future. The internet has made buying and selling shares cheaper and simpler, while it has also made a wide range of information available free of charge. For example, setting up an ISA can be done in a relatively short space of time, while the cost of buying stocks and funds can be as low as £1.50 per trade.
Gambling vs investing
As for whether buying and selling shares is akin to gambling, the reality is that investing in any company or fund carries risk. However, a quick glance at the returns of a wide range of funds, shares and tracker funds in the last 10+ years shows that they generally offer high-single digit returns each year. As such, it may not take a significant investment at the end of each month to build a pension pot that is substantially larger than the UK average.
Clearly, contemplating retirement at a relatively young age is challenging. However, investing even modest amounts each month in a variety of shares could lead to an income in retirement that allows an individual to continue to lead an abundant life.