The full UK State Pension currently stands at a little over 8,500 per year, or164 per week.Thats not going to get you a life of luxury, but if you could double it youd certainly be better off. Is that possible?
I have a lump sum thats been extricated from an old company pension and, with probably at least another 10 years before Ill want to hang up my work boots (the ones I kick the computer with when its playing up), Im feeling reasonably confident.
But if you dont have any company or private pension lined up, how much would you have to set aside to double your State Pension by the time you retire? The two main variables are the time you have left before youll need your pension, and what annual return you can expect from your investments.
Dividends
The FTSE 100 looks set to deliver an overall dividend yield of a record 4.9% in 2019, according to the latest Dividend Dashboard from AJ Bell. Yields almost certainly wont remain that high long-term, but I think setting a goal of an income of 4% per year from dividends when you retire is not unreasonable. By investing in the big dividend payers and eschewing those that dont offer much, you can get a better dividend return than the average.
To get the equivalent of an extra State Pension of 8,500 per year from a 4% dividend yield, on the day you retire youll need a pot of 212,500. Any capital appreciation through share price rises after that will be a bonus, and some years youll see them fall. But if youve chosen dependable dividend payers, your income stream should be pretty safe.
How much should you invest to reach that 212,500? I reckon with a long-term strategy of reinvesting all your dividends in more shares, an average annual return of around 6% is feasible.
Monthly amounts
If I were starting now, without the cash from my company pension and without my other investments with the estimated 10 years before I might consider retiring, Id need to invest approximately 1,300 per month to reach that target. That wouldnt be possible for me.
But, like many, Id have some home equity to cash in come retirement day when well move to somewhere cheaper. And thats something that many can look forward to downsize your home and add a chunk to your pension pot.
What if youre 10 years younger and have 20 years to prepare for your retirement? At the same annual 6% returns over two decades, youd have to stash away a much lower monthly sum of 466. Thats only a little more than a third of the 1,300 youd need to set aside in the 10-year scenario.
The younger the better
Are you getting the picture that the earlier years of investing make a significantly bigger difference than the later years?
If you have 30 years at your disposal, a mere 217 per month will suffice to get you to your 212,500 target the extra 10 years drops it to less than half the 20-year requirement.
And if youre still a fresh-faced 20 year-old, you could reach your twice-State-Pension target by age 60 with just 111 per month and waiting another two years until youre 62 to retire, you could do it on a mere 100.
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