To double your State Pension in retirement, I calculate you’ll need to have put away £213,655 by the time you eventually quit the rat race. This is based on the ‘multiply by 25’ rule.
This rule is a shortcut savers can use to try and estimate how much they’ll need to save to achieve a certain level of income in retirement. What you do is take your desired level of income and then multiply it by 25. So, in this case, the new State Pension is currently £164.35 a week, or £8,546.20 a year. Multiplying this figure by 25 and that gives you £213,655.
There’s a range of methods you can use to try and hit this target, but I believe the best strategy by far is to invest your money.
Double your money
According to research put together by analysts at investment bank Credit Suisse, over the past 119 years (as far back as it’s possible to go), UK stocks have produced an average annual return for investors of 5.4%, after inflation. By comparison, cash has returned just a meagre 1%.
The difference this 4.4% performance gap makes to returns over the long term cannot be understated. For example, £1,000 invested in UK stocks back in 1900 would be worth £567,238 today, based on the above figures. The same amount invested in cash would be worth just £3,277. No, that’s not a typo.
If a picture paints a 1,000 words, then these numbers are just as informative. If you want to build wealth for retirement, the best way to do it is to invest your money.
Time to start investing
A low-cost FTSE All-Share tracker is possibly the best way to invest for the future. This index comprises the 600 largest companies listed in London today and is probably the best way to get exposure to the sort of returns I’ve highlighted above.
Over the past 10 years, including dividends to investors, the index has produced a total annual return of 7.9%, or approximately 5.4% after inflation.
At this rate of return, it won’t take that long to build a pension pot big enough to double the State Pension. My figures suggest a saver would be able to put away £220,000 with a monthly contribution of just £350 for 25 years from a standing start. That’s assuming an average annual return of 5.4%.
The earlier you start saving to meet this target, the better. With 30 years of saving, I reckon it would take contributions of £200 a month to reach that £213,655 goal.
It’s difficult to dispute these figures. So if you want to double your State Pension in retirement, the fastest and easiest way to do so is to invest your money. You don’t need to look any further than UK stocks to do this. The returns really do speak for themselves.
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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.