It’s natural to start thinking about the State Pension when you hit 50. I did, so looked it up and discovered it’s worth just £175.20 a week.
That’s low, isn’t it? The full New State Pension in the UK works out at just over £9,110 per year. Or in monthly terms, a little higher than £759. I’d find it tough to survive on that meagre amount. So, for me, the solution is clear. I need to build up my own pot of money to supplement the state provision in retirement.
Embrace the State pension and match it!
Of course, that’s not a terribly original conclusion to arrive at. The internet, magazines, newspapers and other media scatter articles about financial retirement planning like confetti. Everyone, it seems, is banging on about the need to provide for your own financial needs in retirement.
But don’t sniff at the State Pension. It has the potential to contribute a big chunk for you in your twilight years. So, make sure you claim it when the time comes. And, if you’re 50 now, your State Retirement Age will likely be 67.
However, doubling the State Pension would mean you’d have to find an additional income worth £759 per month by the age of 67. That gives you 17 years to get there if you’re 50 now. And, assuming the ‘worst-case’ scenario, you’ve got no meaningful savings to begin with. And that’s nothing to be ashamed of. The demands on the finances of the middle-aged are the stuff of legend!
Meanwhile, one way of drawing your own annual income of £9,110 to match the State Pension is by taking dividends from FTSE 100 index tracker fund. And I reckon that’s a good way because the Footsie is known for the dividend-producing companies in its ranks. Right now, for example, the dividend yield of the FTSE 100 is running just below 4%. However, the yield is depressed because of the coronavirus crisis, and often runs higher.
Shares could be key
But, assuming a yield of 4%, you’d need an investment in the FTSE 100 worth around £228,000 to generate an annual income from dividends of £9,110. And I reckon the best way to achieve that over 17 years is by investing in shares and share-backed vehicles, such as funds held within a Stocks and Shares ISA, or in a pension wrapper, such as a SIPP.
Studies have shown that the long-term return from shares in aggregate tends to run in the high single-digit percentages. So, assuming you can achieve an annualised return of 7% from your investments, we can figure out how much you’d need to invest each month to reach £228,000 in 17 years. I used one of the several online compound interest calculators and it told me you’d need to invest £600 a month to get there.
That works out at just over £138 per week. A stretch, maybe, but surely the prize is worth going for. And if you choose your shares and funds carefully, there’s a chance you could achieve a higher return and accumulate your investment pot sooner.
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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.