With the State Pension currently amounting to £8,767 per year, aiming to live off it in retirement may be somewhat challenging. As such, an alternative source of income in older age appears to be a necessity, rather than a luxury.
Although the idea of doubling the State Pension in retirement may sound difficult to achieve for many people at a time when the cost of living is increasing rapidly, doing so may be more achievable than it seems at first.
Here’s why investing even modest sums of money in FTSE 100 dividend stocks through a tax-efficient product could double your State Pension in retirement.
Perhaps the first place to start when seeking to generate a nest egg for retirement is in an account that offers tax efficiency. This could save an investor significant sums of money over the long run, with minimal additional effort.
A Stocks and Shares ISA, for example, is not subject to capital gains tax or dividend tax. Similarly, investing through a SIPP avoids both of these taxes. Both products are straightforward to open, and the cost of managing them each year is relatively low when the tax efficiency they offer is taken into account.
At the present time the FTSE 100 has a dividend yield of around 4.3%. This suggests that it offers good value for money, and may be able to deliver capital growth over the long run. However, even if it fails to post any capital growth over the coming years, its income return alone may be sufficient to build a sizeable retirement nest egg.
In fact, investing £100 per month in FTSE 100 dividend stocks that together offer a yield of 4.3% could produce a nest egg of around £200,000 over an investor’s lifetime. This assumes an individual starts investing at age 18 and continues to invest until they retire at 68.
A £200,000 nest egg could offer an income that is very similar to that of the State Pension, should an investor use their dividends as an income. This would ensure that no capital is used for an income, which could mean that the portfolio offers sustainability.
Clearly, investing in the stock market carries greater risks that having cash savings or investing in other mainstream assets such as bonds. However, the track record of the FTSE 100 suggests that it could produce impressive total returns, and that it will recover from challenging periods that may cause paper losses in the short run.
As such, now could be the right time to start investing in FTSE 100 dividend stocks. With high yields and the prospect of investing tax-efficiently, any investor can build a nest egg that provides them with an improved standard of living in older age when compared to that offered by the State Pension.
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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.