Given that retirement usually feels as though it is a long way off until it is just around the corner, planning for it is difficult. There always seem to be other areas that are more pressing, with one obvious example being a first home.
Given the high rate of growth in property prices over the last couple of decades, many younger people are struggling to get on the property ladder. Even with interest rates still being close to record lows, being able to buy a decent home in a desirable area remains a significant challenge. As such, for many people, retirement saving through a Lifetime ISA is not the top priority.
Rising prices
House prices in some parts of the country, notably London and the South East, have come under pressure in the last couple of years. However, at the same time there are some areas such as major northern cities that are delivering exceptionally high growth at the present time. In the long run, the likelihood is that house prices across the UK will rise at a relatively fast pace. Interest rates are forecast to remain fairly low over the next few years, while government policy is focused on sustaining high demand through schemes such as Help to Buy.
As a result, it may be a wise move for younger people to focus on mounting that property ladder. Clearly, that is easier said than done, given the relatively low rate of wage growth of recent years and the high cost of renting before you buy. But in the coming years, the task could be made more difficult due to a lack of new homes being built versus demand growth.
Compounding
Investing as early as possible for retirement is generally a good idea. It provides more time for compounding to have a positive impact on the final amount. However, the reality is that even someone who is aged 45 with no retirement savings may have enough time to generate a significant nest egg by retirement. Since the retirement age is set to increase to 67 in future (and probably even further), this means that a 45-year old would still have 22 years to make gains on the stock market.
In the last 20 years the FTSE 250 has delivered an annual total return of 10%. If an individual invests £500 per month into an index tracker from the age of 45 until 67, this would lead to a portfolio value of £428k by retirement. Assuming 4% withdrawals each year, this could provide an annual income of over £25.5k including the State Pension. This is only slightly lower than the UK’s average salary of around £28k and means that a comfortable retirement could be on the cards.
Outlook
It is possible to generate even higher returns than those offered by the FTSE 100 or FTSE 250. Through picking the best-value shares on offer, an investor can beat the index and generate an even larger nest egg by the time of retirement. And for those individuals who can still invest a portion of their income each month while saving for a first home, the potential rewards on offer in the long run could be exceptionally high.