Is it really possible to double retirement income from the State Pension by investing in shares? And all for just the cost of a daily coffee?
Theoretically, yes it is. And in practice, many investors have used the stock market to build a meaningful pot of money over time.
Aiming to match the State Pension
Right now, the full State pension is worth £185.15 a week. And that’s around £9,628 a year. Therefore, to double it, I’d need a second income equal to that amount. And I’d aim to get it from shareholder dividends paid by companies in the stock market.
For example, the FTSE 100 index of the UK’s largest public companies has a dividend yield of about 3.5% at the moment. And it is often somewhere in that ballpark — higher some years and lower others. Meanwhile, individual companies often pay comparable yields, or higher. Such as telecoms company Vodafone with its dividend yield of just over 5%.
But let’s be conservative and say I can get 3.5% in dividend yields from an investment in shares. That means to achieve an annual income of £9,628, I’d need to invest a sum of around £275,000. And I’d aim to get there for the price of a daily coffee.
A white Americano from the Costa chain will cost around £3.10. So buying one every day adds up to an expenditure of £1,131.50 a year. And that breaks down to just over £94 a month. I’d divert that monthly money from coffee to investments in stocks and shares.
Billionaire investor Warren Buffett reckons America’s S&P 500 index has delivered annualised total returns of around 10% a year since the 1960s. That’s when all dividends have been reinvested along the way. And the returns from the UK stock market have been impressive as well. I’ve seen estimates that worldwide stocks have delivered an average of around 8% a year over many decades.
The power of compounded returns
But let’s assume an annualised total return of 7% a year from investing the coffee money of £94 a month. An online calculator tells me the investment pot would exceed £275,000 after 42 years. That may sound like a long time. But an individual starting to invest their money at the age of 20 could be in a strong financial position at the age of 62. And all for the price of a daily cup of coffee they’d hardly miss.
And despite ending up with a pot of money exceeding £275,000, the total investment of coffee money over the 42 years will only be £47,522. The rest of the money comes from those 7% annualised gains. And that demonstrates the power of the process of compounding.
However, it’s worth remembering that positive returns are not guaranteed and all shares carry risks as well as the potential for gains.
Nevertheless, compounding works best over long periods of time. And small increases in the annualised return can make a big difference to the eventual size of the investment pot. Therefore, I’d aim to invest in the shares of individual companies in the pursuit of higher gains.
And I’d do that alongside tracker investments following indices such as the FTSE 100.