The full UK State Pension currently stands at a little over £8,500 per year, or £164 per week. That’s not going to get you a life of luxury, but if you could double it you’d certainly be better off. Is that possible?
I have a lump sum that’s been extricated from an old company pension and, with probably at least another 10 years before I’ll want to hang up my work boots (the ones I kick the computer with when it’s playing up), I’m feeling reasonably confident.
But if you don’t have any company or private pension lined up, how much would you have to set aside to double your State Pension by the time you retire? The two main variables are the time you have left before you’ll need your pension, and what annual return you can expect from your investments.
Dividends
The FTSE 100 looks set to deliver an overall dividend yield of a record 4.9% in 2019, according to the latest Dividend Dashboard from AJ Bell. Yields almost certainly won’t remain that high long-term, but I think setting a goal of an income of 4% per year from dividends when you retire is not unreasonable. By investing in the big dividend payers and eschewing those that don’t offer much, you can get a better dividend return than the average.
To get the equivalent of an extra State Pension of £8,500 per year from a 4% dividend yield, on the day you retire you’ll need a pot of £212,500. Any capital appreciation through share price rises after that will be a bonus, and some years you’ll see them fall. But if you’ve chosen dependable dividend payers, your income stream should be pretty safe.
How much should you invest to reach that £212,500? I reckon with a long-term strategy of reinvesting all your dividends in more shares, an average annual return of around 6% is feasible.
Monthly amounts
If I were starting now, without the cash from my company pension and without my other investments — with the estimated 10 years before I might consider retiring, I’d need to invest approximately £1,300 per month to reach that target. That wouldn’t be possible for me.
But, like many, I’d have some home equity to cash in come retirement day when we’ll move to somewhere cheaper. And that’s something that many can look forward to — downsize your home and add a chunk to your pension pot.
What if you’re 10 years younger and have 20 years to prepare for your retirement? At the same annual 6% returns over two decades, you’d have to stash away a much lower monthly sum of £466. That’s only a little more than a third of the £1,300 you’d need to set aside in the 10-year scenario.
The younger the better
Are you getting the picture that the earlier years of investing make a significantly bigger difference than the later years?
If you have 30 years at your disposal, a mere £217 per month will suffice to get you to your £212,500 target — the extra 10 years drops it to less than half the 20-year requirement.
And if you’re still a fresh-faced 20 year-old, you could reach your twice-State-Pension target by age 60 with just £111 per month — and waiting another two years until you’re 62 to retire, you could do it on a mere £100.