Are you looking to double the value of your State Pension? I’m going to explain how you could do that, and it might be easier than you think.
The full New State Pension currently stands at £164.35 per week, which works out at just over £712 per month or around £8,546 per year. Whichever way you look at it, that’s not much to live on.
Building your own pension pot – the easy way!
But the good news is you’ve got a fair chance of being able to generate your own retirement pot of money capable of equalling or even exceeding the value of the State Pension.
If you can invest £5 for each day you work, you’ll be well on the road to achieving your goal. That’s the price of a meal-deal Monday to Friday each week. Pack your own sandwiches and you could be on course for saving £250,000 by retirement!
Invest £5 per working day and you’re investing £25 per week or around £100 per month. That’s a good start and the ‘magic’ of compounding could get you to your goal.
Let’s assume you can earn an average return of 7% annually on your money. This could be achieved by simply investing regular monthly sums into an accumulation tracker fund that follows the fortunes of the FTSE 100 index or the FTSE 250 index and automatically reinvests dividends. Indeed, those tracking the FTSE 250 index since it started in 1992 have earned total annual returns greater than 7%.
The ‘magic’ of compounding
This is what the process of compounded returns will do to your money if you invest £100 each month in your tracker fund and earn a 7% annual return, which is automatically invested back in:
|
Years invested |
Total paid in |
Total return |
Total pot |
|
10 |
£12,000 |
£5,202 |
£17,202 |
|
20 |
£24,000 |
£27,041 |
£51,041 |
|
30 |
£36,000 |
£81,606 |
£117,606 |
|
40 |
£48,000 |
£200,552 |
£248,552 |
It’s clear from the table that time works ‘miracles’ through the process of compounding, and compounding works to grow your investment exponentially.
After 10 years of investing £100 and earning a 7% annual return through dividends and growth in the underlying share prices of the firms in the index you are tracking, you’ll get a return of just over 43% on the money you put in.
After 20 years, your return is almost 113%, so you’ll earn more than you originally put in. After 30 years, the return is almost 227%, or more than twice the value of what you put in. After 40 years, your return is almost 418%, or more than four times what you put in – wow!
A quarter million for the price of lunch!
Nothing’s certain, but the illustration shows what’s possible, and why compounding is key to getting rich through investing.
After 40 years, your pot will almost be worth a quarter of a million and all for the price of lunch!
With £248,552 in your tracker, you could switch from accumulation to distribution, which means the dividends will be paid to you rather than being reinvested. Right now, the FTSE 100 yields in excess of 4% a year, which means you’d get around £9,940 each year thus doubling your retirement income compared to the State Pension alone.