In the UK, the full new State Pension is £230.25 a week, or a total of £11,973 a year. That’s certainly a nice chunk of change to help out during retirement. But sadly, it doesn’t come close to what’s needed to live comfortably. According to the Pensions & Lifetime Savings Association, a pensioner needs to have an income of at least £43,900 a year to enjoy financial freedom once retirement comes a-knocking.
The good news is investing just £500 a month can potentially help close the £31,927 gap when starting early.
Earning £32,000 passively
Let’s start by crunching some numbers. By following the 4% withdrawal rule, to earn a £32,000 investment income, an investor needs to have a portfolio valued at around £800,000. Obviously, that’s not pocket change. But reaching this target with £500 of capital each month is more than doable with a sufficiently long time horizon.
On average, the British stock market has historically delivered annualised gains of around 8% a year. Investing £500 at this rate will eventually reach the £800,000 threshold within a period of 31 years. So for those planning to retire comfortably at 65, the best time to get started is at the age of 34.
However, there are a few tricks to cut down the waiting time for those who are a little late to the party.
Exploring later solutions
Leveraging the power of a Self-Invested Personal Pension (SIPP) is likely a sensible move when it comes to retirement investing. That’s because deposits are entitled to tax relief equal to an individual’s income tax bracket. Assuming an investor’s paying the basic rate, for each £500 deposit, they could end up with £625 of investable capital. And that extra £125 monthly bump is enough to cut the waiting time by around three years, allowing a later start at the age of 37.
But what about those already in their 40s? This is where stock picking can potentially save the day.
Instead of relying on index funds, investors can take matters into their own hands and craft a custom investment portfolio. There’s no denying this involves a lot more effort and likely exposes an investor’s wealth to greater volatility and risk. But by taking a measured and prudent approach, it’s possible to earn considerably more than 8%.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The power of stock picking
Let’s look at Computacenter (LSE:CCC) as an example. The company’s a value-added retailer of IT hardware, software, and services, predominantly helping hyperscaler data centres as well as other businesses and public sector agencies. With technology rapidly evolving, having a supplier who knows all the intricate details about the tools available and who can steer clients in the right direction has proven invaluable.
As such, shareholders have enjoyed a fairly consistent stream of rising revenues, profits, and dividends. However, the firm’s undoubtedly reliant on a few key clients, creating customer concentration risk. At the same time, ample competition has put pressure on margins over the years.
Nevertheless, Computacenter’s steady success has paved the way to a 13.4% average annualised return over the last decade. And at this rate, the journey to £800,000 in a SIPP is cut down to around 20 years. So for any 45-year-old looking to secure their retirement beyond the State Pension, hunting for Computacenter-like stocks while keeping risk in check and ensuring a balanced portfolio might be the solution.
