When people talk about investing for retirement they usually mean pensions. The mere word conjures up thoughts of scandal, poor performance and hand-wringing from the Government about the future of the little beasts. Plus, frankly, it’s pretty off-putting. ‘Pension’ smacks of age and decrepitude, not glamour and fun which is what we’re all aiming at for our golden years, of course.
In fact, pensions are simply another form of investment. But:
- They’re specifically designed for your retirement
- They offer tax breaks while you’re saving, and
- They have strict rules as to when you can take the money out and what you have to do with it.
But there are alternatives. What you need to have is (fanfare, trumpets and glitzy curtain…) a retirement fund.
Your retirement fund is exactly what it sounds like – a pot of money you accumulate over the years to pay for your glorious, glamorous retirement. It can be made up of all kinds of different sorts of investments (including or not including a pension) but whatever vehicle(s) you’ve used to build up the money, you need to end up with a pot of cash which you can then invest in something that will pay you enough each year for you to live on it for the rest of your life.
A Retirement Fund
The catch is – in order to live decently off your investments you need to have a serious amount of cash stashed away. To give you an idea, the current average yearly wage in this country is around £22,000. When you retire, you are supposed to be able to keep your money invested and live off the interest. In order to make that amount in interest a year, you would have to have around £400,000 invested. And don’t forget, you have to keep up with inflation so if you will be retiring in twenty years time you will have to have a LOT more than that to have the same buying power.
That’s because, on average, you’re likely to make about 5% (gross) on your investments. That’s the amount you tend to get in safe investments (when you’re retired ideally you should have your money invested in something that’s not going to swing wildly up and down).
How to get there
It seems like an enormous amount of money, but (believe it or not) it’s achievable for lots of people.
- The earlier you start saving for your retirement fund, the better.
- Because of the joy and wonder of compound interest, even small amounts of money invested early on will more than match quite large contributions that you may have to make later in life.
- So even if you’re a low earner in your twenties and thirties, it’s still worth putting away a little each month – at the same time as saving for more short-term goals like a deposit for a flat.
- Even if you are a low earner and in your forties or fifties, don’t let it stop you. A small amount saved at that stage is usually better than nothing saved at all.
- It’s worth going through some of the ideas here: Control Your Finances, Get out of Debt and Financial Oneupmanship to free up some more money to invest.
- If that doesn’t work, increase your income with ideas from Making That Bit Extra and Free money.
What you put that money into should be decided by you. Your retirement fund could include various different investments including a pension, Isas, cash, perhaps some property and even your stamp collection. How you make up that retirement fund is up to you. Just make sure that you do it.
For more detail on the various types of pensions, go here.
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hi I’m 60 on the 3rd May this year & plan to continue working until July 2014 when my husband reaches 65 & so finish work together, I have a private pension I took out 20 years ago & think it will mature at about £17,000.00. what would you advise I do take the cash, bank it in a bond or similar for 5 years until I do finish work or buy a retirement fund/anuity. I have the full 30 years entilement for for my state pension which I plan to take from the 6th May & invest it in our ISA’s
look forward to your reply
thanks Marian