The State Pension in Britain isn’t much. The current maximum payment is £164.35 per week, which works out at £712.18 a month, and £8546.20 a year. Of course, if you have a partner who is also old enough to collect a pension, you’ll both get it, which means your combined income will be double the figure, at £1,424.36 a month.
Whichever way you look at it, I reckon it’s a good idea to build up an independent retirement pot of money that you can draw on to supplement your state-paid pension. Unless you’d rather rely on eating less in retirement and capping the central heating thermostat at 17 degrees celsius! But how can you save when the demands on your income are so great now? Here’s a plan.
Live below your means
One of the biggest barriers to saving money is spending it all! But people do save, whatever their income, and the ‘trick’ is to make a habit of keeping the cost of your lifestyle just below the level of your income.
As Charles Dickens had the character Mr Micawber say in the novel David Copperfield:Â “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
If you manage to save a little every month you can direct it towards your retirement plan. However, sometimes people suffer from what I’d describe as lifestyle-creep, which means even if their income goes up, they raise their lifestyle to ‘keep up’ and still don’t manage to save anything. So watch out for that.
Pay off your debts
I worry that the debt culture in this country is being made worse by making university graduates start their careers with tens of thousands of pounds of borrowings. I think it sends an unintentional message that personal debt is nothing to worry about. But in my old-fashioned view, personal debt is a toxic state of affairs that will likely keep you poor in retirement, if you let it.
The ‘secret’ of building a hefty retirement pot is to compound your money. But you can’t easily earn compound interest if you are paying compound interest on loans and borrowings. So, I’d recommend diverting the money you save each month to paying down any debts that you have before anything else.
Invest your money
Once the debts are cleared, you can put that regular monthly amount you are saving towards compounding your pot of money. One of the best ways to do that is to invest in shares. Over the long haul, shares have proven to be the best compounders of money of all the main classes of assets, such as cash, bonds and property.
But you don’t need a degree in investing to do it. You could choose a low-cost, passive FTSE 100 index tracker fund that automatically reinvests dividends, and put your monthly savings into that. It’s even better if you hold it within a tax-free stocks and shares ISA wrapper. Passive investing like that has a record of outperforming most fund managers and private investors anyway, and over the long haul, your pot will likely compound to a substantial amount.