That said, what is the same for everyone is the desperate need to start retirement savings earlier and to do it more consistently. The numbers speak for themselves on the power of compounding over time, and they are too important to ignore. Let’s compare the following three investors:
• An investor who saves £5,000 a year from the age of 25 and then stops at the age of 35, saving £50,000 in total
• An investor who saves £5,000 a year from the age of 35 to 65 years old, saving £150,000 in total
• An investor who saves £5,000 a year from the age of 25 to 65 years old, saving £200,000 in total
Who has the most in their retirement pot at the end? Assuming an average 7 per cent annual return for all three of our investors, our investor who started at 25 years old and saved consistently throughout her working life had the most, with a comfortable £1.2m by the time she is 65 years old. That is perhaps not surprising, but interestingly our investor who saved early and then stopped at only 35 years old actually has more in her retirement pot than our investor who started at 35 years old and saved significantly more of her income over her working life. The investor who started early and then stopped has £602,000, whereas the one who waited until 35 years old to start saving has just £540,000.
Saving is important and so is diversification, as a balanced portfolio is better poised to generate returns in all types of market environments. We know that the best and the worst-performing asset classes can vary widely in any given year, but over the long term, a portfolio that is diversified across equities and bonds can help to dampen volatility, providing a smoother ride.
No matter how you choose to tackle the retirement income question, many investors are going to find they are well served by multi-asset income funds that are accessible and easy to understand. These funds can offer the potential to build and preserve wealth, beat inflation and reduce the risk of outliving your assets.
Jasper Berens is head of UK funds and Talib Sheikh is a fund manager of JP Morgan Asset Management
Key points
There are two potential models for structuring a sustainable DIY retirement income stream.
Structuring a suitable retirement income stream is different for everyone, taking into account a huge amount of personal consideration.
The investor who started at 25 years old and saved consistently had a comfortable £1.2m by the time she is 65 years old.
