The full State Pension currently stands at £8,767.20 per year, or £168.60 per week. You might be able to scrape by on that when you retire, but I think it would be a push at best. And even if you can keep body and soul together, there’s not going to be a lot of luxury.
Coffee
It’s slightly tricker to pin down the price of a coffee, because there’s such an overwhelming range of options these days — looking at the menu at a well known coffee chain, I count 21 different options for latte alone. But the average price seems to be around £2.50, so I’ll settle on that as my figure here.
Can we really divert the cash spent on coffee towards a wealthier retirement than we could hope for on just the State Pension? According to market researcher Kantar Worldpanel, people in the UK spent £6.3bn on coffee in the year to February 2018, and that includes 930m lattes. So yes, I’d say a lot of people out there could save a meaningful sum if they cut down their coffee spending.
Strategy
What would I do with £2.50 per day? That’s £912.50 per year, or an average of £76 per month. What I’d do with that is start saving it in a Stocks and Shares ISA — not a Cash ISA, oh no, because interest rates from those don’t even match inflation, meaning they’re guaranteed to lose money in real terms.
Every time I’d accumulated enough, I’d invest it in shares. What do I mean by enough? Most ISA providers offer fixed commission charges, typically around £10-£12 per transaction, and there’s a 0.5% tax called stamp duty on buys (but not on sells). To keep costs down to a manageable percentage of an investment, I reckon around £500 to £1,000 is a good minimum, which would mean one or two share purchases per year at coffee rates.
Now the big question, which shares? That would be easy for me — I’d go for top FTSE 100 stocks paying good dividends. Right now the index is on a forecast average dividend yield of 4.8%, but many top companies are paying significantly more than that.
Dividends
Here are a few top yields — BP 6.2%, Aviva 7.1%, Lloyds 6%, WPP 6.1%, Centrica 6.8%, Taylor Wimpey 10.6%. As of the the third quarter of 2019, according to AJ Bell‘s Dividend Dashboard, 26 stocks in the FTSE 100 were on forecast dividend yields of 6% or more, with an average among them of 7.8%.
At the moment, targeting an annual dividend yield of 7.8% seems eminently achievable. To rake in the extra £8,767 needed to double the State Pension at a 7.8% income rate, you’d need to build a cash pot of a bit under £114,000. That could be achieved in 31 years by investing the cost of a coffee per day in a dividend portfolio earning 7.8% per year, and reinvesting the dividends.
Long term
Now, we won’t always be in such high dividend times, but over the next few decades there will almost certainly be some decent share price growth to add to the mix too. And if you can up your investments to the price of two cups, you’d cut the time needed to 23 years — or double your pot (and so treble the State Pension) in the same 31 years.
And just think what you could achieve if you invest the price of a couple of pints of beer per day.
