While the State Pension age is set to rise to 68 over the next couple of decades, the amount paid out per annum could pose the biggest problem for many people. It currently amounts to just over £8,500 per year. This is around a third of the average UK wage, and suggests that it is unlikely to be enough to allOw you to enjoy financial freedom in older age.
Certainly, living costs may be lower in retirement than they are at other times in a person’s life. But the reality is that most people will need to have income other than the State Pension in order to have sufficient financial resources in their retirement years.
Nest egg
Fortunately, there are a variety of means through which to generate additional income in retirement. Products such as Lifetime ISAs and SIPPs offer greater control over a pension, while workplace pensions continue to have appeal due in part to their simplicity. And with all three options offering tax breaks (or, in the case of a Lifetime ISA, a government bonus), investing through them seems to be a sound means of generating a nest egg which can then be accessed from the age of 55 (or 60 in the case of the Lifetime ISA).
Income
Since the average wage in the UK is around £27,500, tripling the State Pension through an additional income could be a worthwhile goal in terms of income in retirement. As a result, an income of around £17,000 from a pension plan would be required in order to provide a total income per year of £25,500 including the State Pension. Assuming that an individual withdraws 4% from their nest egg each year, this would mean that they require a total pension fund of around £425,000 by the time they retire.
Returns
Obtaining a nest egg of £425,000 by the age of 68 may sound somewhat challenging. However, investing in the stock market could be a means of achieving that goal. The FTSE 250, for example, has delivered a total annualised return of around 9% during the last 20 years. Assuming that an individual is able to invest £150 per month in the FTSE 250 over a period of 40 years, they could have a nest egg of over £600,000 by the time they retire. And with £150 per month working out as approximately £5 per day, it is likely to be achievable for a wide range of people.
Challenges
Clearly, saving for retirement is not easy. It is difficult to find the spare cash each month for something that seems so far away. However, with the State Pension seemingly inadequate and retirement likely to come along a lot faster than most people realise, it could be worth investing even modest amounts in a range of stocks for the long term. This could be a means of providing greater financial security and freedom in older age.
