At present, the standard State Pension for retirees after the age of 65 is around £9k a year. However, according to several studies, this tiny amount isn’t even enough for most pensioners to live on when they quit the rat race.
Therefore, today I’m going to explain how you can start saving to beat the State Pension with just £5 a day. Using this relatively small amount, savers can build a substantial nest egg with the potential to produce a sizable State Pension beating income in retirement.
A fiver a day might not seem like much, but when combined with the tax benefits available by using a SIPP, it can make a big difference.
For example, £5 a day works out at around £152 per month. Any SIPP contributions are entitled to tax relief at a taxpayer’s marginal tax rate (20% for basic ratepayers). As such, after including tax relief, this monthly contribution jumps to £190 a month or £2,281 a year.
The best way to grow this money is to invest it in a low-cost passive tracker fund. The FTSE 250 is an excellent index to track for this purpose because it is an index of mid-cap companies, which tend to produce better growth rates than their larger peers.
Indeed, since its inception, the FTSE 100 has returned approximately 9% per annum. The FTSE 250, on the other hand, has returned closer to 12%.
Building the pot
The combination of a SIPP, with its tax benefits, and FTSE 250 with its double-digit returns, is a powerful one for investors.
I calculate that monthly deposits of £190 over 30 years would build a pension pot worth £671k from a standing start. This would be enough to give an annual income of at least £26,000 for 25 years in retirement, more than triple the current rate of the State Pension.
If you don’t have the luxury of time on your side, it is still possible to accumulate a pot of £190k from a standing start over two decades.
That would be enough to produce an annual income around the same level as the State Pension for two-and-a-half decades.
No matter how much time you have left to go until retirement, or how much you can afford to put away, by using the principles above, you can build a substantial retirement pot with just a few clicks.
Most online stockbrokers now offer a regular monthly investment plan with a direct debit facility from as little as £50 per month. So, once you’ve set up your contributions, there’s no further effort required.
In the meantime, passive tracker funds require no babysitting as they’re only designed to track their underlying index. There’s no need to choose a manager or pick strategies. You just need to set up the monthly transactions and forget about them.
So what are you waiting for? Now is the time to start saving to beat the State Pension.
The post How I’d beat the State Pension with just £5 per day appeared first on The Motley Fool UK.
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Rupert Hargreaves owns no 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 2020