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Could you beat the State Pension with £200 per month?

Roland Head
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Many of us worry about whether we’ll be able to support ourselves when we reach retirement age.

The current State Pension of £168.60 is a useful extra, but for many of us it’s just won’t be enough to live on.

In this article I want to talk about building your own retirement fund to provide extra passive income when you retire. I’ll look at what you might realistically expect to achieve with £200 per month and consider other factors that will affect your future wealth.

Start now

If you want to build a retirement fund that will match or beat the State Pension, then the first thing you should do is start investing today.

Don’t worry about exactly how much you can save each month. It doesn’t have to be £200, or even £100. Using a Stocks and Shares ISA, you can save as little as £25 into a low-cost FTSE 100 tracker fund.

The power of compounding means that the sooner you start, the bigger your eventual returns will be.

Here’s a quick table showing how much you could expect to save over different time periods.

No. Years

Value of fund @£200/mo.

Amount needed to match
State Pension

20

£117,804

£359,152

30

£298,072

£459,745

40

£698,201

£588,512

I’ve based my sums on an 8% annual return, which is typical of the long-term performance of the UK stock market. I’ve also estimated the minimum fund size I think you’d need to match the State Pension, after inflation, based on a 4% annual withdrawal rate.

You’ll notice that unless you’re starting in your late 20s, £200 per month probably won’t be enough to match the State Pension when you retire. That doesn’t mean saving isn’t worthwhile – any extra income when you retire is always going to be a bonus.

However, what if your goal is to double the State Pension? What are your options?

Be like Buffett

If you want to save £200 for 20 years and be able to match the State Pension, my sums suggest you’ll need to achieve an average annual return of about 16%. To be honest, I think that’s a pretty tough challenge.

Warren Buffett has achieved an average annual return of about 20% over many decades. But he’s one of the greatest investors the world has ever seen. Most of us aren’t Buffett and won’t perform this well over such long periods.

Of course, if you’re able to save more each month then you’ll be able to match the State Pension more easily. My sums suggest that saving about £600 per month for 20 years should be enough.

Please don’t do this

There are only two things I wouldn’t do. The first is to invest all my cash into one or two high-risk shares in the hope of making huge gains quickly. More often than not, these speculative trades end up delivering big losses.

The second thing I’d avoid is selling shares during a market crash. If the whole market crashes, then there’s probably nothing much wrong with your shares. It’s just the market cycle.

My advice would be to keep paying in each month. While prices are down, you’ll get more shares for your cash. And when the market recovers – which it normally does – the value of your investments will rise more quickly.

Remember the old saying – it’s time in the market that counts, not timing the market.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). 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 2020