The most you can get from the State Pension these days is £8,767 per year, which isn’t great. If you can double that from your own investments and achieve a retirement income of £17,534, you’ll be in a much better position. Can you really do that with just £30 per week? You can, if you plan ahead.
Which ISA?
What size pension pot will you need to generate that much income? With a Cash ISA you’ll be lucky to see an interest rate of 1.5%, meaning you’d need to stash away a sum of more than £584,000 by retirement. Accumulating that much from a Cash ISA at those rates, saving £30 per week, will take you 127 years — and, even then, your gains won’t have matched inflation. So let’s forget a Cash ISA.
A Stocks & Shares ISA is my firm favourite for long-term wealth, with the money invested in top quality shares. What kind of returns can you expect? If you reinvest all your dividends, a lot of experts suggest around 8% per year is a reasonable expectation. I think that’s a bit optimistic. I reckon 6% per year is well within range.
In retirement, you really shouldn’t withdraw your total gains to live on, which would mean taking your dividends and also selling some shares to get the price-rise portion of your return. You need to preserve your capital so that your future dividend income will keep up with inflation, and a strategy of selling shares to live on could be risky.
Dividends
So let’s target a dividend-only return of 4% for topping up your pension — the FTSE 100 is currently on an overall yield of 4.5%, so I think that’s reasonable.
To earn your target of an extra £8,767 in income per year from a 4% dividend yield, you’ll need to accumulate a pot of £219,175 by the time you retire. With a total return of 6% per year with dividends reinvested, it would take a little over 38 years to get there. That’s fine if you’re aged 30, or younger, but what if you’re older?
Don’t despair, just remember we’re only talking about £30 per week here which, for many people on a night out, wouldn’t even cover their taxi fares. Can you live a little less extravagantly and stretch to £50 per week to invest for your retirement?
On that still-modest amount, you’d exceed the desired £219,175 retirement sum in 31 years rather than 38 years. Stretching to £75 per week, you’d do it in 25 years — and we’re still only talking about setting aside £325 per calendar month out of your salary.
Even more
Why stop there? If you have 30 years until retirement, investing £500 per month would get you to a sum of £489,628 which, based on 4% dividends thereafter, could lift your retirement income to £28,352 per year.
The real key to investment is time. If you could start investing that £500 per month when you first start work, say at age 18, the following 50 years would see you accumulate well over a million — £1,798,127, in fact, which could boost your pension to £80,692 per year. That might be too much to start with but, as your career progresses, you should be able to grow your contributions, and perhaps soon exceed £500 monthly.
This is all in today’s money, but if you raise your contributions in line with inflation, you’ll have that licked too.
