Under the current State Pension system, recipients are entitled to £164.35 per week, which works out at around £8,546 a year.
According to a survey by consumer magazine Which, the average retired household spends £2,200 a month, or around £26,000 a year, on average. So it’s clear that if you plan to retire on the State Pension alone, it’s not going to be enough.
However, by putting away just £30 a week, you could double your income in retirement.
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Saving for retirement
Most savers and investors switch off when it comes to pensions, but this topic isn’t that complex. You don’t need a degree in maths to work out the sooner you start saving, the better. And the more frequently you put money away, the faster your savings pot will grow.
It all comes down to the power of compound interest. Put simply, this is the process of interest earning interest. In other words, your money making money.
By using the power of time and compound interest, you don’t have to work that hard to see a sizable return your money.
For example, according to my numbers, if you put away just £100 a month and invest it, or save it at a rate of 5%, over the space of 50 years that small monthly contribution will grow to be worth £263,300. In this example, £100 a month, or £1,200 a year, is approximately £23 a week, the same price as a meal out for one.
Double your income
So how much would you need to put away to be able to double your State Pension?
Because there are so many different factors to consider, it’s virtually impossible to arrive at a final figure that is 100% reliable. However, we can use the multiply-by-25 rule (also known as the 4% rule) to arrive at an estimate. If you take your desired annual income (£8,546) and multiply it by 25, you get an estimate of how much you need to save. In this case, the total is £213,615.
Over the past decade the UK’s leading index, the FTSE 100, has produced an average annual return of approximately 7%. To keep things simple, I will be using this rate of return in my calculations because the FTSE 100 is an index that is simple and easy to understand for all investors.
At a rate of return of 7% per annum, you would need to invest £30 a week, or £130 a month, to build a pension pot worth £230,000 over the space of 35 years. This is slightly more than the multiply-by-25 rule above, but it’s only a rough estimate. Further, the more you can save, the more comfortable your retirement will be.
Conclusion
At the current rate of £8,546 a year the State Pension is not enough to retire on comfortably. However, by putting away just £30 a week, you can save enough to more than double your income in retirement.
In my opinion, it’s certainly worth making this small weekly contribution to prepare for the future.
