Don’t ‘save’ for retirement! Here’s how I’m hoping to double my State Pension

Living on the income from the State Pension alone could be difficult, says Roland Head. He looks at the monthly savings needed to double this income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It may seem sensible to save some extra cash to boost your State Pension. But with the best cash savings rates topping out at about 1% these days, I think that saving in cash will make it difficult to build the kind of wealth that’s needed to double the income from the State Pension.

In this piece I’ll explain how I’d aim to double the State Pension using a simple stock market strategy.

Why double the state pension?

At the time of writing, the full State Pension is £175.20 per week, or £9,110.40 per year. That might not be enough to support a comfortable lifestyle in retirement.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

My aim for retirement is to try and generate a matching income from investments. That would mean my total income would be double the State Pension.

How much would I need to save?

Financial advisors often use an approach known as the 4% rule to estimate how much someone will need to fund their retirement.

This rule says that you should be able to withdraw 4% of your investment fund each year for 30 years, adjusting for inflation, without running out of cash. This isn’t guaranteed. But with the dividend yield on the FTSE 100 sitting close to 4% today, the idea of withdrawing 4% each year seems safe enough to me.

Based on this approach, my sums show that if I retired today, I’d need investments worth £227,760 to generate an income of £9,110.40 per year — the State Pension amount.

What about inflation?

Sadly, I’m not retiring today. Let’s assume I can retire in 20 years. For my sums to work reliably over such a long period, I need to consider inflation.

The Bank of England’s target rate of inflation is 2%. Based on this assumption, I calculate that in 20 years I’ll need investments worth £338,439 to generate an income that’s equal to the State Pension.

Cash savings: this is going to be difficult

Saving up £338,439 in cash isn’t going to be easy when interest rates are so low.

My calculations show that based on an interest rate of 1%, I’d need to save £1,274 per month for 20 years to hit my target.

Stock market: let’s speed things up

Over the last 100 years or so, the average return from the UK stock market has been around 8% per year.

Using this rate of return in my calculations suggests that I could hit the £338,439 target in 20 years by saving £575 per month. That’s less than half the monthly payment required under my cash savings model.

How would I invest to double the State Pension?

There are lots of options. But in this case, I’d probably go for the simplest choice. I’d open a Stocks and Shares ISA and pay into a low-cost FTSE 100 index fund each month.

My experience suggests that index fund investing is likely to be the simplest and most reliable way to generate an income that will double the State Pension.

Of course, investors who buy individual stocks can outperform the wider market. But making a success of this approach requires a fair amount of time spent on research and investment education. This is a more difficult and riskier approach, in my view.

Amazing Nerd Stock smashes FTSE with 1,346% gains

What makes this company so extraordinary?

It has a cult-like following of nerdy fans who tend to spend lots of money…

potentially handing investors market-beating gains in any economy.

Though past performance does not guarantee future results, last year, this amazing company saw:

  • Double-digit revenue growth - to a total £470,800,000
  • Profits explode 46%
  • Insiders buying a monster £492,000 of shares

…Setting investors up for - what could be - another decade of spectacular returns.

Want to consider joining them?

Then grab this special report: ‘One Top Growth Stock from The Motley Fool’ which includes both the risks and opportunities.

Secure your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »