Planning for retirement can be a stressful and difficult experience. Not only does it require you to live within your means to accumulate the capital required to build a nest egg, it also demands an inflation-beating return to generate a fund large enough to provide a passive income in older age.
As such, it can feel like a hugely challenging process. However, by following a few simple steps, it could be made much easier. Here’s how you could improve your prospects of enjoying financial freedom in older age, and reduce your reliance on the State Pension.
Saving small amounts on payday
With the cost of living being high, it is difficult to live within your means. It is also tempting to spend everything in your current account each month, which makes saving money more difficult. Therefore, it could be a good idea to set up a standing order that sends a modest sum of money from your current account to an ISA on payday. That way, there may be less temptation to spend all of your salary each month.
Saving small amounts can really add up when undertaken on a regular basis. Therefore, while it may seem as though saving modestly is unlikely to have an impact on your retirement plans, it can lead to a surprisingly large nest egg in older age.
Invest regularly
While holding your money in a savings account may seem like a good idea, the reality is that it is unlikely to aid your retirement plans. The key reason for this is that the returns on cash are exceptionally low, and are set to continue to be disappointing over the coming years. With inflation being at a modest level and the prospects for the economy being uncertain, the interest rates on Cash ISAs and savings accounts may stay at low levels for many years.
The result of this could be a return on your cash that fails to beat inflation. Therefore, while your balance may be rising, it may not be increasing at a rate that increases your spending power.
By contrast, investing in a diverse range of shares is likely to offer much higher returns in the long run. For example, the FTSE 100 has returned 9% per annum since its inception 36 years ago. This could lead to a doubling of your investment in just eight years. Therefore, investing rather than saving could be a shrewd move.
Tax efficiency
Using a tax-efficient account such as a Stocks and Shares ISA could be a shrewd move in the long run. No tax is paid on amounts invested through them. This may not impact on your finances in the short run. But, when seeking a passive income to live off in older age, avoiding dividend tax could be a highly worthwhile situation that ultimately leads to a higher level of income.
With a Stocks and Shares ISA being low-cost and simple to administer, it could be a logical vehicle through which to build a retirement nest egg to enjoy financial freedom in older age.