Saving for retirement can seem a daunting prospect, which is why many people tend to put it off until the last minute. But this is probably one of the worst things you could do and is one of the five crucial mistakes many make when they’re saving for retirement.
Start saving early
Thanks to the power of compound interest, the sooner you start saving, the easier it is to accumulate sizeable pension pot. For example, according to my calculations, a saver investing £100 a month for 10 years at an interest rate of 5% per annum would build a pension pot worth £15,550.
However, if the same saver started putting money away 20 years earlier, over three decades, the £100 a month deposit would grow to be worth £83,000, assuming an annual return rate of 5%.
Make it easy
Another big mistake is trying to save too much. It’s very easy to give up on saving for the future if you’re having to go without today. Therefore, it pays to make sure you’re saving as much as you can, but not too much to ensure that you can stick to your savings plan for the long term.
Over the past few decades, the government has introduced a range of products to help savers. These include Self Invested Personal Pensions (SIPPs), Lifetime ISAs (LISAs) and ISAs. Any money saved and invested inside these wrappers don’t attract tax. What’s more, any money you invest in your SIPP will be topped up by 20% by the taxman, and the same goes for the LISA.
Ignoring these tax reliefs and benefits can be a colossal mistake, mainly because they could be worth many tens of thousands of pounds over your lifetime.
Invest your money
As well as ignoring all the tax-efficient savings products on the market, another big mistake Britons make when saving for retirement is not investing their money. Over the past 100 years, UK stocks have produced an annual return after inflation that’s five times higher than cash, on average. The impact this could have on your wealth over the long term cannot be understated.
£10,000 invested in a Cash ISA earning just 1% a year will grow to be worth £13,500 over the space of 30 years. Meanwhile, the same £10,000 invested in the stock market, earning 5% per annum, could be worth as much as £44,000 over the same time frame.
It’s relatively straightforward to achieve these kinds of returns by investing your money in an FTSE 100 or FTSE 250 tracker fund. These funds are usually low cost and track the underlying index, so you don’t have to worry about picking stocks, or a fund manager picking the wrong stocks on your behalf.
Walk, don’t run
Finally, one of the biggest mistakes people can make when saving for retirement is to try to rush the process. Retirement saving is a marathon, not a sprint, and it doesn’t make sense to take on more risk for the promise of higher returns.
Stocks and bonds are the best assets to use for long-term saving. More esoteric assets like hotel rooms, car parking spaces or fine wine might offer the promise of higher returns, but more often than not, these schemes end in failure. It’s better to stay away altogether.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019