If you’re worried about the State Pension, you’re not alone. Figures suggest thousands of retirees don’t know how much money they are entitled to in retirement, and many more think that the money they do receive will be inadequate to provide them with the kind of lifestyle they currently enjoy.
If this is you, I’m going to outline a strategy you can use to help you sleep easy and improve your financial situation in retirement.
A simple strategy
To do that, you don’t need a degree in finance or an IQ of 180. All you need is a savings plan and the FTSE 100.
The premier index is a great investment tool as it gives you access to the 100 largest listed companies in the UK at the click of a button. And today there are many low-cost index tracker funds investors can buy to gain exposure to the Footsie 100 with almost no effort.
Buying the index will give you exposure to a diversified basket of some of the world’s largest companies, which currently support an average dividend yield of 4.5%.
Using the index can help you sleep easy because you don’t need to worry about picking stocks, or worry about whether the companies you own will cut their dividends. Even if as many 10 of the companies in the FTSE 100 decide to cut their dividends all in one go, the index’s dividend yield should remain in positive territory. At the same time, you don’t have to worry about trying to pick growth stocks.
With the process of stock picking taken care of, all you need to do to make sure you have saved enough for retirement is to have a sensible savings plan in place, investing this money in a simple FTSE 100 tracker fund.
Time to start saving
How much you need to invest depends on what sort of income you want in retirement.
For the 2019/20 tax year, the full new single-tier State Pension will rise to £8,767.20, although the actual amount you will receive will vary depending on your National Insurance Record and various other different factors.
As I have explained before, to double this level of income in retirement roughly, you will need to save just under £220,000 (using the multiply-by-25 rule). Reaching this target will require some extra saving, but it should be worth it over the long term as this retirement safety net will help you sleep easy.
£375 a month
How much do you need to save to reach this target? It depends how long you have until retirement, but according to my research, over the past decade, the FTSE 100 has produced an average return for investors of 8% per annum. At this rate of return, I calculate you’ll need to save £1,200 a month for 10 years to build a £220,000 pension safety net.
If you have more time it’s easier to reach this target. Saving £375 a month for 20 years at an interest rate of 8% is enough to get you to this target, according to my figures.
So, that’s why I believe the FTSE 100 can help you sleep easy if you are worried about the State Pension.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.