Hope is not a retirement strategy

And recently, I’ve had several conversations that can be summarised as real people experiencing real poverty in retirement.

This is the sort of thing that the financial press and the savings and pensions industry has long warned about, of course. It should hardly come as a surprise to people that the state pension – if that’s your only source of income – doesn’t open the door to a luxury lifestyle.

But by the time you reach your mid-sixties, if that’s the situation that you’re in, then there’s not a lot of time left to do much about it.

Rose-tinted glasses Time and again, surveys tell us that people are wildly optimistic when it comes to financial planning and providing for their old age.

• They over-estimate what they’ll get from the state pension.
• They under-estimate long they’re likely to live.
• They make ridiculous assumptions about funding a retirement by selling their houses, overlooking that they’ll need somewhere to live.
• And they imagine that employer-provided pensions will be as generous as they were in the 1970s, 1980s, and 1990s.

The clock ticks Granted, life can throw you curve-balls – illness, redundancy, divorce, and so on. These can be serious setbacks.

Granted, too, money might be tight after providing for children, and paying the rent or the mortgage.

And there’s not a lot that any of us can do about the state of the economy. Recessions and periods of slower-than-average economic growth, can act as a real brake on prosperity and disposable income.

But through all this, the clock ticks. The years pass. One day, you will retire – which poses the problem of funding that retirement.

Parking the problem in the long grass for decades is simply ridiculous: hope is not a strategy.

So what is a strategy? You know the answer to this: save, and invest.

Why don’t people do it – even when they know that they should? The answer: more self-delusion, on an equally heroic scale.

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They haven’t any spare money with which to save and invest, they tell themselves – almost certainly erroneously. Most lifestyles involve choices, and people are usually choosing to spend the money some other way, on something else.

More damagingly, people tell themselves that saving and investing won’t make any real difference, because they are unlikely to generate a return meaningful enough to make a difference in retirement.

Wrong, again. Saving might not yield the return you want – especially at today’s interest rates. But investing certainly should. 

Long-run returns For a fairly reliable take on investing returns, I’m a huge fan of the annual Barclays (LON:BARC) Equity/ Gilt study, which has been published each year since 1956.

And looking at the figures, over the past 35 years or so, the stock market has delivered a long run inflation-adjusted return of around 5% per annum.

So what might £100 a month, saved and invested for 35 years, yield on such a return? The answer: a sum of £114,082 – a hardly inconsequential sum. Especially on an inflation-adjusted basis.

Invested in higher-yielding shares in retirement, it would provide an annual income of £5,100 in today’s money – which of course could be expected to grow over time, as dividends increase. 

Beat the market Let me leave you with two thoughts, both of them encouraging.

First, however difficult it might be to save £100 a month at the start of the 35-year period, it should get easier over time. And save an average of £200 over time – say – and you’ll end up with proportionately more: £228,000, and a potential dividend income of £10,260.

More importantly still, though, remember that the annual Barclays Equity/ Gilt studies are based on stock market averages – what investors might get from an index tracker that tracked the returns of the market as a whole, and delivered no more than that.

And here at The Motley Fool, several of my colleagues would regard that as a very modest aspiration indeed.