The State Pension currently stands at £8,767 per year. For most people, this will prove to be insufficient to fund their retirement. As such, saving money on a regular basis makes sense, and could allow an individual to retire early or enjoy greater financial freedom in older age.
In fact, even modest amounts invested in a variety of stocks can lead to surprisingly large amounts over the long run. Here’s how investing just £50 per month over a lifetime could allow a retiree to treble their State Pension.
High returns
Assuming someone is able to invest £50 per month between the ages of 18 and 68, they could build a nest egg of around £490k by the time they retire. This could be achieved by investing in a range of mid-cap shares, with the FTSE 250 having delivered an annualised total return of around 9% during the last 20 years.
If it delivers the same level of performance over the 50-year time period in question, £50 per month could become a nest egg that’s able to generate an income return of around £19,600 per year in retirement. This would be generated by paying an income of 4% of the total capital per year, which may mean there’s still an opportunity for growth in its value over the long run.
Since £19,600 is more than twice the current State Pension, it would mean they can enjoy a trebling of their retirement income compared to receiving the State Pension in retirement. Clearly, inflation isn’t factored in and there may be unforeseen circumstances during the 50-year time period. However, it serves to show that modest amounts of capital invested regularly can lead to a significant improvement in retirement income.
Increased opportunity
In previous years, investing £50 per month may not have been advisable due to the high cost of buying shares. However, with online sharedealing costs having fallen in recent years, it’s possible to invest small amounts often. For example, many sharedealing providers offer regular investment options. This is where a lower charge of £2 or less is applied to trades that are planned in advance. This could mean an individual sets up a regular investment each month and then isn’t required to spend a significant amount of time managing it.
Furthermore, with an ageing population and the continued rise in the State Pension age, obtaining a second income in retirement could become increasingly important. While starting to plan for this at the age of 18 may not always be possible, even a shorter time period can allow compounding to have a significant impact upon a person’s eventual retirement nest egg.
With indices such as the FTSE 250 seeming to offer good value for money at present, now could be the right time to start planning for retirement in order to become less reliant on the State Pension.