Do you really fancy spending your retirement years struggling to get by on a State Pension of £8,500 per year? I know I don’t.
Wouldn’t you be a lot more comfortable on twice that, at £17,000 a year? Once we reach retirement age, most people’s mortgages are paid, our offspring have long fled the nest, and living expenses should be significantly reduced.
In fact, some estimates suggest costs of going to work — travel, food, clothing, etc — can easily consume 10% of your net income. That can easily come to around £2,500 a year or more, and that’s a big chunk extra for funding your retirement years. Yes, I reckon I could live pretty decently on around £17,000 per year.
Salary
Average take-home pay in the UK is around £450 per week these days (or possibly a bit more depending on who you ask, but I’m being conservative here). How much of that do you think you’d need to invest in order to double your pension income?
If you have 30 years before you’re set to retire, it could be as little as £50 per week. Let me explain.
I’m basing my calculation on investing in FTSE 100 companies, specifically those that pay dividends. And I’m thinking about what yields you’re likely to get and how much you’d need to have accumulated by the time you retire.
FTSE yield
The FTSE 100 as a whole is expected to provide a dividend yield of 4.9% in 2019. Now that’s something of a record and yields like that are unlikely to be maintained over the long term. And I do think it’s a sign of shares being underpriced right now and that we’re possibly in one of the best times to invest I’ve seen for some years — but that’s a digression.
By buying only shares that pay decent dividends, you should be able to get a better yield on your portfolio than the Footsie average. But again I’ll be conservative, to accommodate dividend yields falling in future years, and to allow for companies occasionally facing hard times and having to cut their dividends — as happened to financial stocks during the banking crisis.
Even with all of that, I think a portfolio with an overall yield of 4.5% should be relatively easy to achieve. What sum would you need to generate the £8,500 per year required to double your State Pension? Approximately £189,000, but let’s target a retirement pot of £200,000 to be on the safe side.
How long?
What if you could manage an average long-term total return (that’s dividends plus share price gains) of 6% per year over the next few decades? I reckon 6% is, again, well within the bounds of possibility.
Investing £50 per week with a 6% total annual return would get you over the £200,000 mark in 30 years. So if you’re aged 30 and hope to retire at 60, getting started now should see you make it.
And if you can invest more (say, if you earn better than average wages), £100 per week at the same rate of return would get you £200,000 in just 21 years — or a pot of more than £400,000 over 30 years.
You could then take your dividends to live on, and still have a growing stash of capital untouched.
