Most of us would like to imagine we’d be financially comfortable when we retire. Having worked hard for many years, we want to be able to enjoy relaxing holidays, new hobbies and help out our families if need be.
Unfortunately, retiring comfortably requires a decent-sized pension pot. The State Pension of £8,767 per year is unlikely to be enough. Here, I’m going to explain the two-pronged approach I’m taking to build my retirement wealth.
Step 1: Boost your cash flow
When I was a child and was thinking about spending my pocket money, my parents were fond of telling me that “you can only spend it once.” Unfortunately, they were right! Spending today is cash you are taking from your future self. Likewise, saving today is a gift to your future self.
One obvious way to free up cash for retirement investing is to spend less. I’m not suggesting you should live like a monk for 20 years, dining on instant noodles, and never taking a holiday.
But for many of us, it would be quite easy to free up an extra £100-£200 per month by cancelling unused subscriptions, taking a cheaper mobile phone plan and cutting back on takeaway coffees and meals out.
Remember, £100 per month saved for 20 years could be worth £58,902, assuming a long-term average rate of return of 8% each year.
Could you earn more? For many people of working age, earning more can be the most powerful way to increase your wealth. If you can do so without increasing your spending, you’ll enjoy a rising tide of spare cash. This can be invested without requiring any Scrooge-like sacrifices.
Asking for a pay rise doesn’t come easily to everyone. But there’s no reason you should be paid less than you’re worth. The secret to pay negotiations is good preparation and a reasonable attitude.
Another approach that can work well is to take a new qualification or extra training in your spare time. A couple of years’ hard slog could open the door to much higher future earnings.
Step 2: Invest better
How should you invest your cash? My choice is the UK stock market, which has delivered an average annual return of about 8% per year over the long term.
I invest my cash in a tax-free Stocks and Shares ISA, but a good alternative is to use a Self-Invested Personal Pension (SIPP). Each option has pros and cons, but both options are available from low-cost DIY investment platforms.
Where I’d invest? A simple and effective way is to put cash into a FTSE 100 tracker fund. This may sound dull but, as I mentioned, the London market — mainly the FTSE 100 — has returned an average of 8% each year over the long term. Saving £200 a month for 20 years could leave you with a retirement fund worth £117,804.
If you want to take investing a step further, I’d consider investing directly in a selection of FTSE 100 dividend stocks. I’d aim for a diversified mix of companies — I think a portfolio of about 20 works well with this strategy.
Most of my own retirement savings are invested in this way, with a view to holding these stocks long-term and reinvesting the dividends.