One thing that seems clear is the UK State Pension alone is unlikely to provide comfortable finances for most people in their retirement.
As things stand, the maximum we’ll each receive in pension payments from the government’s New State Pension is £168.60 per week. Annually, that works out at £8,767.20. Or, in other words, a pitifully small amount of money for an individual to live on in their golden years.
Many of us will be fit, active, adventurous and joyously inclined to make the most of work-free lives, but low income could be a major constraint to living life to the fullest in retirement.
You may not need as much as you think
But we can prepare for a more prosperous workless future by taking some action to save and invest while we’re still earning. And you don’t have to accumulate as much as a million pounds to ensure decent finances ahead. At today’s prices and figures, I reckon accumulating funds of just £250k could be more than enough to double your income in retirement when you add it to your State Pension.
If, by the time you retire, you’ve managed to save and invest your way to a retirement pot worth £250k, and the money is sitting in your tax-free wrapper, such as a Self-Invested Personal Pension (SIPP), Stocks and Shares ISA, or Workplace Pension, you’ll have some attractive options.
For example, you could invest the money into an FTSE 100 index tracker fund. The Footsie dividend yield is about 4.5% right now and, if you make sure you select the ‘income’ version of the tracker fund, you can use the dividends to live on alongside the pension you’ll be getting from the state.
A 4.5% yield on your invested capital of £250k will produce an annual income of £11,250, which more than doubles the state provision. Now it’s true companies can vary their dividend payments, and the income from your tracker fund could fall a bit at times, but many companies are wedded to progressive dividend policies and your dividend income could rise over time too.
Minimising the risks from individual shares
You could live for decades in retirement and, over the long haul, the stock market does tend to rise. That goes for both share prices and dividends. Meanwhile, your FTSE 100 tracker investment will be backed by the performance of 100 or so underlying businesses, which will certainly help to minimise the risk of any underperformance from individual companies affecting your retirement finances.
So, I’d aim for saving £250k or more by the time I retire. And I’d do it by making regular monthly investments into index tracker funds and carefully chosen individual shares while being sure to reinvest the dividends along the way.
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Kevin Godbold has no position in any 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.