Would you feel comfortable relying on an income of just £168.60 per week? That’s a total of just £8,767 per year. Recent research suggests that for most retired people, this isn’t enough to cover even the basic costs of living.
The figure quoted above is the current value of the new State Pension, which is paid to people who’ve retired since 6 April 2016. As things stand, this payment will rise each year by whatever’s higher, the average UK wage growth, UK inflation, or 2.5%.
The current State Pension seems to be supported by both main political parties. But for those of us who won’t reach retirement age for 20 years, or more, I think it’s fair to assume that the State Pension system will probably have changed again by the time we reach retirement age.
If you’ve got a company pension, then you have some protection from these risks. But if you’re responsible for your own retirement planning, as I am, then I think planning for an extra income is a top priority.
I’m aiming to double the State Pension
My aim is to generate enough income from my investments to match the State Pension. So my total income would be double the State Pension. That’s £17,534 at current levels.
One of the standard methods used by financial advisers to work out how much you need to save for retirement is known as the 4% rule. In short, this says you can withdraw 4% of a lump sum each year for 30 years, plus increases for inflation, without running out of cash.
How much should you save each month?
Based on today’s State Pension, the 4% rule indicates you’d need £219,175 to generate a matching income of £8,767 per year. Of course, the State Pension will increase each year to reflect inflation. This means in future years you’ll need a larger savings pot to generate a matching income.
I’ve done some calculations to show how much you might need to save each month to achieve this goal. I’ve assumed the State Pension rises by 2.5% each year:
|
Number of years to retirement |
Monthly payment required |
|
10 years |
£1,534 |
|
20 years |
£610 |
|
30 years |
£308 |
The advantages of starting saving early are pretty clear — starting 10 years earlier roughly halves the amount you need to save each month.
I’m banking on the FTSE
I’ve assumed an annual term return of 8% each year in these calculations. That’s the approximate long-term average from the UK stock market.
One way to hopefully match this result would be to invest money in a FTSE 100 tracker fund each month. If possible, this should be inside a tax-free Stocks and Shares ISA. That way you won’t have to pay tax on any future income or capital gains.
A tracker fund is cheap, simple and should be reliable, over the long term. However, I don’t really want to own all of the companies in the FTSE 100. That’s why my preferred solution is to invest in about 20 handpicked dividend stocks from the index.
I’ve applied various rules to my portfolio to select a group of diversified, high-yield dividend stocks which I think have a safe future. Of course, there are no guarantees. But, in my view, this is a good way to build a fund to support a comfortable retirement.
