The Motley Fool

The State Pension: how this £5 ‘trick’ could potentially double your payout

It’s no secret that the State Pension is not a lot of money. At just £164.35 per week (and that’s if you qualify for the full amount, which many people don’t) you’re looking at an annual income of around £8,500. That’s simply not enough to live a comfortable lifestyle in retirement, according to respected charity the Joseph Rowntree Foundation (JRF), which recently calculated that you need £10,000 per year at least to enjoy a minimum acceptable standard of living (more than just housing and food) in your later years.

Double your retirement income

However, while the State Pension numbers may sound daunting, the good news is that it’s very easy to boost your retirement income significantly, by establishing a savings and investment plan ahead of time. Take action while you’re still in your 40s, instead of leaving your retirement planning until the last minute, and you could potentially double your retirement income by putting away as little as £5 per day. Allow me to take you through some calculations.

Building an income-generating portfolio

The key to this strategy is building up a portfolio of ‘dividend’ stocks. Dividends are regular cash payments that companies pay to shareholders out of their profits. They can be a great way to generate a second income stream in retirement.

Generally speaking, it’s not too hard to pick up a dividend yield of around 5% from a portfolio of stocks. A dividend yield is similar to an interest rate on a bank account – it’s the rate of income you receive on your investment (although it’s not guaranteed). 

Doing the maths, to generate a dividend income stream of £8,500 in retirement (roughly the same income as the State Pension), assuming a 5% dividend yield, you’d need a portfolio worth around £170,000 (£170,000 x 0.05 = £8,500). Could you build up a portfolio of that size in time for retirement?

£5 per day could get you there

A portfolio worth £170,000 may seem like a stretch for many, however, if you start planning early enough, it could certainly be achievable.

For example, if you started saving at 40, giving yourself around 28 years to save, and earned an average rate of around 8.5% per year on your money by investing it in the stock market (stocks generally return around 7% to 10% per year, on average, over the long term), you’d only have to save around £33 per week to build up a portfolio worth £170,000 by the time you retire, according to my calculations. That equates to less than a fiver per day.

The cost of a sandwich and a coffee

You heard that right. Just £5 per day saved (roughly the cost of a sandwich and a cup of coffee) from age 40 to age 68 could potentially double your State Pension, if your money was invested effectively over the 28-year period. That means you’d be looking at total income of around £17,000 per year in retirement, as opposed to just £8,500 – a big difference! 

In my view, a fiver per day seems like a small price to pay to potentially double your income in retirement.

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