The Motley Fool

With £2 a day, I’d double my State Pension like this

Image source: Getty Images

The New State Pension works out at £730.60 per month or a little over £8,767 per year. In order to make your own independent income worth about the same each month, which you could draw on alongside the State pension when you retire, I reckon you need to accumulate about £225,000.

Harvesting the return from shares

I’ve chosen that amount of money as an example because the FTSE 100 share index of the UK’s largest public limited companies is currently yielding more than 4% a year in dividends. So, with £225k, you could put it in a FTSE 100 tracker fund today and collect the dividend income to supplement the State Pension. If the tracker yielded 4%, you’d have a second income worth £9,000, which is just over the state provision.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

If you start putting away £2 every day, you’ll be saving almost £61 each month and you can start compounding your money. But putting it in a cash savings account will stop it from working hard enough for you, so I wouldn’t do that. Interest rates on cash savings accounts are pitifully low right now and you’ll need your money to compound at the highest rate of return you can get.

Historically, there have been higher annualised returns available from investing in the stock market. For example, Nerdwallet, the US-focused website, reckons the average annualised return from the stock market over the past 100 years has been 10%. So, potentially, you don’t even need to pursue a complicated investment strategy to reach your goal of accumulating £225,000.

Tracking the market, compounding the returns

I reckon a decent plan would be to pay your £61 each month into an index tracker fund, perhaps one that follows the FTSE 250 index or America’s S&P 500. But there are many trackers to choose between, each covering a different area of the market or a particular geographical focus. You can hold your tracker within a tax-efficient Stocks and Shares ISA or perhaps a Self-Invested Personal Pension (SIPP). Make sure you select the accumulation version of the tracker fund, which will automatically reinvest all your dividends for you along the way. You can switch to the income version of a tracker fund when you retire and draw on the dividends to supplement your State Pension.

But how long would it take to save £225k if you are putting away £61 each month? Let’s be a little more conservative than Nerdwallet and assume you manage to compound at an annual return of, say, 8.5%. According to the online calculator I used, it would take about 39.5 years. That’s not such bad news if you are just starting out in your career because for just £2 a day, you’ll be able to provide for comfortable finances in retirement.

You can speed up the compounding process by investing more each month or by earning a higher annualised return. And one well-trodden path for beating indices is to invest in carefully chosen, good-quality individual shares.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.