While a State Pension helps to fund the retirement of millions of Britons every year, the reality is that £164 per week is unlikely to be sufficient on its own to provide financial freedom in older age. As such, many people may be seeking to make simple changes to how they manage their finances now, so that that in retirement they do not need to rely on the State Pension. With that in mind, here are two simple steps that you can take now to potentially enjoy a higher income in your golden years.
Forget cash
While for many people ‘cash is king’, the reality is that the return on cash is exceptionally poor. Although prior to the financial crisis it was possible to generate a higher return than inflation on a cash balance, those days sadly passed many years ago. Today, no savings account in the UK can beat inflation. This means that every year the spending power of a cash sum declines. By the time of retirement, cash savings are unlikely to provide much assistance.
As a result, investing in shares could be a better idea than putting cash into a savings account. Even using a FTSE 100 or FTSE 250 tracker fund would be very likely to outperform cash (and inflation) over the long run. Best of all, a tracker fund requires minimal set-up and next-to-no administration. As such, even the most time-poor of investors can generate returns that are significantly higher than cash.
Manage risk
For many people, the one reason they choose not to invest is because of the higher risk involved in doing so. For others, risk is not a major concern, and they end up investing in a private business, a buy-to-let or some other venture which lacks diversity.
A better idea could be to take a position somewhere in the middle of those two standpoints. Ultimately, there is only minimal return without risk. And if an individual has a long-term time horizon then they can afford to invest in riskier assets. As such, for many people there should be more risk taken in order to provide them with improved retirement savings.
For others, though, buying a range of shares or assets as opposed to being overly-concentrated in one area could be a shrewd move. It will help to reduce the specific risk of the asset in question. And while there is always the potential for an economic downturn or difficulties in specific parts of the economy, having a diverse portfolio could help to protect an individual from such challenges.
Managing risk may not be the most exciting part of planning for retirement. But the reality is that not taking enough risk can lead to a smaller nest egg than required. Meanwhile, taking too much risk can cause a reliance on the State Pension which, given the increasing retirement age, may not be a good move for any investor.
