The Motley Fool

How you can transform your State Pension with £5 per day

For many people, worrying about retirement is a relatively common occurrence. One reason for this is the challenge of knowing how much money will be required in older age. Indeed, it feels as though it’s becoming increasingly difficult to live the financially-free retirement that many people dream about. With life expectancy increasing, and the State Pension becoming less generous, income in older age is being squeezed.

Start small

As with many concerns and anxieties, the key to overcoming worries about financial health in retirement could be to start small. Since the State Pension pays just over £8,500 per year, it’s unlikely to be sufficient to provide the lifestyle that many people desire, and deserve, in retirement. Therefore, investing in assets throughout a working life is likely to be the key starting point to generating a sufficient nest egg on retirement.

Starting small could mean investing just £5 a day. Over the course of a year, this amounts to £1,825. When invested in an index such as the FTSE 250, this could provide a surprisingly generous nest egg. In turn, that could be used to boost an individual’s State Pension.

With the FTSE 250 having generated a double-digit annual total return over the last 20 years, it has the potential to make a significant impact on an individual’s finances in retirement. Assuming £5 per day is invested in the index, and compounding takes place on an annual basis, a nest egg of over £800,000 could be generated over a period of 40 years. This could provide an annual income of £32,000, assuming 4% of the capital is withdrawn each year in retirement.

Getting started

With the emergence of online sharedealing, getting started with investing for retirement has never been easier. Setting up an online account is relatively straightforward, and many providers don’t charge any maintenance fees. The cost of buying shares is also relatively low. Smaller investors may wish to take advantage of aggregated dealing, where orders from a number of customers are combined by the sharedealing provider on a specific day. This helps to keep buying costs to as low as £1.50 per trade for the investor, and could be a sensible method for individuals wishing to invest regularly.

Furthermore, with an ISA providing a simple means of avoiding tax, the long-term growth of a retirement fund could be given a further boost. Withdrawals from an ISA are, of course, tax-free. This could make it even simpler for an individual to know how much capital they will have available on retiring, and may make it easier to determine an annual income

Clearly, the State Pension is unlikely to be sufficient for many people. The stock market, though, provides a potentially simple solution for individuals wishing to supplement their State Pension. And even if a 40-year timeframe is not available, investing for even part of that time period could lead to an improved financial situation in retirement.

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