The Motley Fool

How saving £1.50 per day could double your State Pension

Since the State Pension amounts to just £164.35 per week, or £8,546 per year, many individuals are likely to need another source of income in retirement. After all, the State Pension amounts to just a third of the UK average annual income, which suggests that it may not be possible to obtain financial freedom in older age without an additional source of income.

While generating a sizeable nest egg that can increase your income in retirement may sound like a daunting task, it is possible to do so through modest savings. Here’s how you could save just £1.50 per day and double your State Pension.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Compounding

While saving £1.50 per day may not sound like enough to make a real difference to your income in retirement, if it is undertaken over the long term, then it could generate a significant nest egg due to the impact of compounding.

For example, the FTSE 250 has generated total annualised returns of around 9.5% over the last 20 years. Although it is not guaranteed to achieve that same level of return in future, assuming it does could mean that even small amounts of capital benefit from high, compounded returns. Investing in a variety of FTSE 250 stocks could mean that £1,000 invested today is worth almost £38,000 in 40 years’ time.

Regular saving

Of course, many individuals may not have £1,000 to invest today. However, investing smaller amounts regularly could still enable them to access the benefits of compounded returns. And since the internet has lowered dealing charges and made aggregated orders available, the cost of investing is now likely to be the lowest it has ever been.

Therefore, investing £1.50 per day in the FTSE 250 over the course of 40 years could mean that an investor has a nest egg of £212,000 by the time they retire. Assuming they then withdraw 4% of their capital each year, which is the current dividend yield on the FTSE 100, this would equate to an annual income of almost £8,500. That’s a very similar amount to the annual income from the State Pension, which could mean that an individual is able to enjoy a greater degree of financial freedom in retirement.

Long-term potential

Clearly, inflation means that the spending power of £8,500 in 40 years’ time would be significantly reduced. However, the above discussion serves to show that even modest amounts of savings can generate surprisingly large nest eggs if invested in a variety of shares which offer high return potential.

While the recent pullback in the stock market may put off some individuals from investing, history shows that the FTSE 100 and FTSE 250 have always recovered from their downturns. It may take a number of years for them to do so, but even the most severe recessions have been overcome. As such, now could prove to be a good time to start planning for retirement in order to capitalise on what may prove to be attractive valuations for mid and large-cap shares.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.