Aviva, the insurer and pensions provider, says that millions of people earning less than £27,500 risk facing retirement on a pension far less than £15,000, which is the equivalent of the national living wage today.
And Aviva isn’t the only insurer and pension provider with this damning statistic. A number of pension companies have warned that millions of people are at risk of retiring on incomes far less than the current national living wage. This is a damning statistic.
In short Britain appears to have a retirement crises. The destruction of defined benefit pension plans did nothing to help this.
Yet I still think most people can retire with a pension pot of £1,000,000.
So how exactly can the average Briton save a million in there pension scheme. It is easier than you must think.
How to Save £1 million In Your Retirement Account.
To illustrate this, lets use the example of Paul, a typical man earning the UK average wage of £29,000 a year. He starts working at the age of 22.
In my last article, I already illustrated how the average Brit should be able to save £10,000 a year.
But lets say Paul doesn’t save this amount. He doesn’t even save half this amount. He only saves £4,000 a year. That is only £330 a month or close to £75 a week. Certainly doable for most people.
The first thing Paul does is put £4,000 into his pension pot. He does this via his after tax income. Due to tax relief, Paul will have £5,000 in his pension pot, not £4,000. This is why I call pensions a secret magic money box.
Inside his pension, Paul invests in a plain vanilla low cost index fund. Let’s say this index fund earns 6% a year returns – this is below the long term historical average of the stock market.
If Paul does this for his entire working career, by the time he is of retirement age, he will have amassed £1,058,717 in his pension scheme.
That is over £1 million.
You might be shaking your head at my calculation. But go ahead and do the computations for yourself. You will see how quickly compounded returns add up over time.
So if it is this simple, why do the majority of people not end up with pension pots not even close to a million?
This is because they start too late.
Most people only begin to get interested in pensions when there are in there late 30’s, 40s and 50s. At this point it becomes to hard to generate crazy returns from compounding as seen by this example.
Say Paul only started to invest at the age of 40. But instead of socking away £4000 a year, he puts away £10,000 a year. More than double.
Firstly due to tax relief, that £10,000 becomes £12,500.
Paul again in a low cost index fund earning 6% a year.
But this time, instead of ending up with over £1,000,000, he only ends up with £783,000.
Time horizons matter. Start investing early.
I found the below from Morgan Hounsel particularly fascinating:
“What if Warren Buffett got serious about investing when he was age 22 (just out of college), instead of age 10?
How much would he be worth today?
That’s 97.6% lower than his actual net worth of $81 billion.”