The maximum New State Pension currently stands at just over £8,767 per year. But I reckon many people will find it tough to live on so little.
So it makes sense to fund your own retirement pot of money while you’re still working, then you can draw on it alongside your pension from the State when you retire.
How £250K could double your State Pension
I’d aim to double the money from the State Pension — anything less than that strikes me as insufficient for comfortable finances in retirement. And to generate an annual income to match that from the New State Pension, I think you need to retire with a pension pot worth around £250,000 at today’s prices.
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One option you’d have when you retire would be to put the £250k into a FTSE 100 tracker fund, for example. Right now, the dividend yield from the FTSE 100 is running close to 4.5%. But let’s be conservative and assume you’ll earn 4% in annual dividends on your FTSE 100 investment when you retire. That would deliver an annual income for you of £10,000, therefore more than matching the income you’ll get from the State Pension.
But is it realistic to aim for accumulating £250,000 if you’re earning an average salary in the UK? I think it is. Indeed, many occupations in 2019 deliver a salary close to a range between £30,000 and £40,000 annually. I’m thinking of roles such as IT technicians, nurses, electricians, sales executives, teachers and others. So let’s take the lowest case and assume a £30k annual income.
How you can grow your monthly investment
You’ll need to commit to putting money away each month, and maybe a reasonable goal is to aim for 10% of your gross income, which would work out at £250 per month on a £30k salary. Could you do that? If you do, you may be surprised at how it can grow over time.
Rather than saving the money in a bank account each month, the best returns can be found by putting it into shares and share-backed investments. Over the long haul, shares have outperformed all other major class of assets such as bonds, cash savings and property. According to Barclays in one interesting statistic, over the past 119 years, UK equities have made annualised returns of 4.9% over and above inflation.
If you invest £250 per month and earn that annualised return of 4.9%, you’ll get to the goal of a pension pot of £250,000 in around 34 years, according to my calculations. So if you start when you’re 20, you’ll potentially get there when you’re 54, in good time for retirement. Start at 30 and you’ll be 64. Of course, you can improve the theoretical outcome by investing more each month, or earning a higher annualised return, or both.
And the great news is that investing doesn’t need to be complicated either. One workable option is to invest regularly into a low-cost FTSE 100 index tracker fund. If you choose the ‘accumulation’ version of the fund, your dividends will automatically be reinvested, which would help you to compound and build your investment faster.
