At the time of writing, the full new State Pension is £168.60 per week, or £8,767.20 per annum. According to several surveys, this token amount isn’t enough to live off in retirement by itself.
Most retirees believe that they need at least £17,000 a year in income to be able to cover essential expenditure. To be able to afford life’s luxuries, such as eating out and going on holiday, retirees believe they need at least £25,000 a year in annual income.
With that in mind, I’m going to explain how I would triple my State Pension with just £10 a week to provide an annual income of more than £26,000.
Saving for the future
Tripling your State Pension would provide an income of £26,301.60 a year. To meet the target, I calculate a saver would have to have saved £438,360 at the time of retirement.
If you want to hit this target, the first thing I recommend doing is opening a SIPP. The great thing about SIPPs is you receive tax relief on any contributions at your marginal tax rate, up to a maximum of £40,000 a year. So, for a basic rate taxpayer, for every £100 contributed, the government will add another £25 to take the total contribution up to £125.
On contributions of £10 a week, or £520 a year, 20% tax relief will boost the total contribution to £54.16 a month. The best way to grow this money is to invest it, and the best investment instrument is, in my opinion, the FTSE 250.
Investing for the future
Over the past decade, this index has produced an average annual return for investors in the region of 9%. It’s quite easy to replicate this performance by buying a low-cost passive tracker fund.
The tracker will do all the hard work of selecting stocks and managing the portfolio for you. All you have to do is sit back, relax, and watch your savings pot grow.
According to my calculations, assuming an average annual return of 9%, it would take 46 years of saving £54.16 a month to hit the £438,360 target pot required to be able to triple your State Pension.
If you don’t have 46 years to save, you can still hit this target. You will just have to save a bit more every month. If you only have 30 years until retirement, I calculate monthly contributions of £250 will be required to hit the target, that’s assuming an average annual rate of return of 9%.
Even if you only have a decade to go until retirement, investing is undoubtedly the best way to grow your wealth the future. As noted above, over the past decade, the FTSE 250 has produced an average annual return for investors in the region of 9%, while the FTSE 100 has returned around 7% per annum.
Compared to the interest rate available on most savings accounts today, which is less than 1%, you just can’t ignore these rates of return.
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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.