As Britons grow closer to retirement, many people may be wondering how they can maximise their retirement savings.
The average UK pension pot for someone aged 64 is £107,300, which coupled with the state pension can produce income of £14,000 a year, data from ONS (Pension wealth: wealth in Great Britain) shows.
However, this is well below the figure of £20,800, which is what the Pensions and Lifetime Savings Association recommends as yearly income for one person which includes the state pension.
A pension income of £20,800 can cover the essentials and a few of life’s small luxuries, but this may not be enough, depending on the type of lifestyle one wishes to lead in retirement.
Britons will need to have saved a total of £296,594 in addition to the state pension.
An expert has shared how Britons can generate a much larger sum in their pensions that many people underestimate.
Albert Soleiman, head of CMC Invest UK said: “The magic of compound interest means if you start early, you can generate a larger sum by investing small amounts regularly rather than large amounts over a shorter period of time.
“For those that put off investing due to the belief they can’t afford to put away a meaningful amount, the compound interest could help you achieve your financial goals – which in this case would be a retirement fund.”
He explained that if someone started investing at 20 years old, contributed £500 a month until they were 65 and earned a six percent return each year, they could retire a millionaire.
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This assumes yearly compounding. Compounding is when people earn interest on interest. This means that not only have they earned on the money they first invested, but they are also earning more interest on the returns from that investment.
He continued: “This does wonders for your returns, especially over the long term.
“Individuals would have put £270,000 aside and would walk away with a lump sum of £1,311,194.
“£500 is a considerable sum, but this example helps to illustrate the impact of a long-term investing plan and how it could help you to achieve financial independence.”
He suggested Britons use a stocks & shares ISAs to start their journey to gain financial independence and save for their future retirement.
One of the best things people can do is start contributing early, he explained.
Mr Soleiman is a “great believer” in the adage that “time in the market beats timing the market”.
The longer people can hold investments, the greater the opportunity for compounding to “work its magic”.
Despite financial markets being volatile, people have a greater chance of riding out the volatility the longer they invest, he stated.
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