“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen, best-selling author of Nothing Down, Creating Wealth and Multiple Streams of Income.
The UK shortfall in retirement funds
HSBC released a worrying study which demonstrated a shortfall in UK retirement funds. With the average retirement estimated at 19 years, the study highlighted that retirees will exhaust their savings in a third of that period, leaving an approximate deficit of 12 years (Source: HSBC 20 Feb 2013). The study, conducted in 15 countries around the world, found that Britain had the worst retirement fund shortfall.
By contrast, the preferred method of saving for the future is still overwhelmingly the high street bank savings account, despite relatively low returns once tax and inflation are taken into account. Savings accounts can lose their power if the interest rate offered by banks and building societies does not keep pace with inflation.
While it is clear that the public still see high street banks as a safe place to store their money, such low returns have encouraged people to explore other means of getting their savings allowance to work more efficiently.
Those wishing to make the most of their personal savings allowance need to take steps to ensure their short term and long term future are provided for. Making the right decisions now will lead to a more secure outcome in the future.
Step 1: Be honest about your future retirement landscape
Know why you want to save. Ask yourself how you want to enjoy your retirement. This will help you formulate the kind of financial provisions you need to make. You may want to spend your retirement traveling or investing more quality time with your family. Picture your retirement landscape and then estimate the level of funds you will need in order to achieve the lifestyle you desire.
Step 2: Get your priorities straight
Saving is a habit best started young. The more time you have to save for your retirement, the greater degree of risk you can take. However, saving for the future is best achieved anytime, rather than not at all. If you come to saving later then, usually, it is better to put aside the maximum allowance your financial situation can afford.
You need to make a comprehensive analysis of your monthly incomings versus expenditure and then dedicate a portion of the remaining income to your savings plan. Remember to plan your savings in line with your hopes and wishes for the future.
Step 3: Save for the future but do not forget the present
According to new research from Ageas Insurance, people are more prepared to insure their pets against serious illness than family members.
In the UK, 4.5 million adults have a critical illness policy, while 5.9 million have pet insurance. This may indicate that while we see rising veterinary bills as prohibitive, we have yet to factor how threats to our personal well-being can also cause considerable damage to our finances.
You never know when a serious incident might impact on your life. Therefore, it is important to develop a multi-layered approach to personal savings. Adopting a strategy that takes care of both the short term and the long term is prudent. Serious illness, loss of occupation or reduction of income can create a massive drain on personal savings. Initiating critical illness cover and life insurance may offer you peace of mind and will act as a buffer between your needs in an emergency and your long term goals for the future. Importantly, this approach can also save you from falling into debt.
Step 4: Choose where to put your money
Eggs in one basket?
A multi-layered strategy of where to place your money is a wise choice. Again, refer to the short and long term goals mentioned before. An easy access savings account might be appropriate for the short term, whereas investing in a stocks and shares ISA may well suit those with a long term outlook, willing to take a higher degree of risk for a greater return. In all cases, review your savings choices to ensure you are receiving the levels of interest that are of most value to your situation.
If you invest in stocks and shares there is, of course, a risk you can lose some of your money, and how much risk will depend on the type of investment. For those who are retiring sooner, a low risk strategy could be a wise option. The longer you have until retirement, the more earning opportunity you have and the greater degree of risk you can afford.
Step 5: Seek advice from trusted professionals about the options available to you
There are many opportunities available to people who wish to save for the future. Making the most of your personal savings allowance is about equipping yourself with all the options. If you are not sure of how much you should be saving, or indeed, how you should be saving, consider taking advice from a reputable financial adviser. Obtaining professional advice may help release the full earning potential of your savings.
Risky Business?
There is always a degree of risk attached to any kind of savings plan. The greatest risk however, is not doing anything at all. The future is always uncertain, but with a little diligent planning, you can make your outlook considerably brighter.
The value of investments can go down as well as up and you may get back less than you invested. The value of tax savings and eligibility to invest in an ISA will depend on individual circumstances and all tax rules may change in the future.
Rosie Percy writes for an assortment of subjects and industries including travel, health and personal finances. Previously, Rosie has written for the Guardian and lifestyle blogs, and now lives and works by the seaside in Brighton. For more information about personal savings allowance and retirement funds visit www.fidelity.co.uk or www.nestpensions.org.uk.