Five dos of investing for retirement

HEALTHY pots of retirement savings don’t grow on trees: you have to plan ahead and save to fund the type of retirement you desire.

A few tips will set you on the path to retirement freedom. Here are five dos of investing for a rosy pension pot...

1. Do use a pension calculator

Get an estimate of how much you should be investing into your pension on a regular basis to achieve the type of retirement you’re aiming for.

This won’t guarantee anything, but it will help ensure that you are working towards a specific goal rather than randomly saving.

In my experience, people who don’t use a calculator are likely to dramatically under-save and are less likely to sustain a savings habit, as they don’t really know what they’re aiming for.

A pension calculator, like this one here, can also show the cost of delaying – so how much more you’ll have to save to reach a certain amount on a certain date.

2. Do start as early as possible

This is probably the most important factor in building up an adequate retirement fund. The earlier you start, the more you will benefit from compound interest (interest on interest) and the sooner you get into the habit of regularly saving for your retirement the better.

Many of us are guilty of putting off saving in the early stages of our career, assuming that it will be easier once we are more established and earning more. This is a complete fallacy as the longer you wait to start contributing to a plan, the more you eventually have to save meaning that as a percentage of your income, the later you leave it, the more you actually have to save.

3. Do make regular contributions

By doing this, you will benefit from a phenomenon known as “dollar cost averaging”, which says that when investment values fluctuate (which they always do), by dripping money into the markets at regular intervals you will be able to buy more units of your chosen investments when markets are down.

Providing that markets rise again, which they generally do, you will have more of that investment and you will end up with a larger investment portfolio than you would if your investment just went steadily up.

4. Do regularly increase your contributions

Your biggest obstacle when it comes to saving adequately for your retirement is not fluctuating investment markets; much more dangerous is the effect that inflation will have.

In terms of making regular contributions, $20 a month in 1980 was worth a lot more than $20 a month in 2010. At 3% inflation, your regular payment could halve in roughly 23 years. You need to increase your payments just to keep pace.

5. Do review your pension investments regularly

You need to do this at least annually: review the performance of the underlying investments and ensure that you have the right asset allocation (mix of assets) for you.

Your situation changes, as does that of investment markets and investment providers. Nothing stands still and neither should you. If you don’t regularly review your retirement savings, you could be in for a nasty surprise when you eventually realise (no doubt when it’s too late) that you either can’t retire on schedule or you won’t enjoy the quality of life that you expected.

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