The maximum you can currently get from the New State Pension when you retire is just over £8,767 per year.
If you can exactly match that pension with funds you’ve generated yourself, you’ll have £17,534 to live on each year when you retire, which is much better.
And you can probably do it with surprisingly little effort if you start early. There’s a good chance you can do it by saving the price of a cup of coffee a day.
How the price of a coffee adds up You can get a cup of Latte at Costa for about £2.45. It’s not uncommon for many people to pop into a Costa branch, or Starbucks (NASDAQ:SBUX), or maybe even McDonald’s (NYSE:MCD) and other outlets for a cup of barista-style, delicious, aromatic and stimulating freshly ground coffee every day. Indeed, I didn’t say saving for a second pension would be entirely free from sacrifice!
But if you didn’t spend £2.45 per day on coffee, you’d have £74.31 per month that you could save towards your second pension instead. Let me be cheeky and round that up to £75 per month.
I think you need to save around £219,180 to generate an annual retirement income of £8,767 per year. When you retire, you could, for example, put it into a FTSE 100 index tracker fund. The great thing is that a tracker fund will pay you dividends, and right now the FTSE 100 dividend is above 4%.
If we assume that an FTSE 100 tracker will pay you a 4% dividend in the future, on an investment of £219,180 it works out at — you’ve guessed it — £8,767 per year, which is exactly what you need to double your State Pension.
How you can multiply your savings What can you do to turn £75 pound a month into £219,180? I reckon your best bet is to invest regularly in the stock market and an index tracker fund would be ideal for the purpose. However, be sure to select an accumulation version of the fund, which automatically reinvests dividends rather than the income version that you might switch to when you eventually retire. Reinvesting dividend helps you to compound the money and you’ll get to your savings goal faster.
According to IG, citing Barclays (LON:BARC) 2019 Equity Gilt Study, over the past 119 years or so, UK equities have made annualised returns of 4.9% over and above inflation. If you achieve that return it will take just over 52 years to reach your goal of £219,180. An individual starting to save the price of a cup of coffee per day from the age of 16, when many begin work, would arrive at the required figure just in time to retire at 68.
But that’s cutting it fine. Raise the amount you save by 33% – a caramel latte per day, perhaps – and you’ll be saving £100 per month, which gets you to the goal in around 47 years.
Of course, earning higher returns is possible, as is saving more. But I’m convinced that saving and investing enough to double your income in retirement is more accessible than many realise. For the price of a cup of coffee a day, why wouldn’t you?
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.
Motley Fool UK 2019