The amount you will need to retire in comfort is very much dependent on the standard of living you aspire to enjoy and the extent of your financial responsibilities. You can’t fail to miss the media-driven doom and gloom surrounding pension poverty and the misery of having to delay retirement. If you are earning minimum wage, it may seem like you’ve no hope of ever seeing light at the end of the tunnel.
For folks retiring today, the state pension is £168.60 per week or £8,767.20 per year. This is not a lot to live on, particularly if you’re used to outgoings of much more than that.
The minimum wage rate varies depending on how young you are and whether you’re an apprentice. The national living wage is the statutory national minimum wage for adults over the age of 25 in the UK. It’s currently £8.21 per hour and is set by the UK government. For under 25s it’s £7.70.
National living wage increase
Chancellor Sajid Javid has recently pledged to raise the National Living Wage to £10.50 within the next five years and the age threshold will then be lowered from 25 to 21. I think it’s about time. I don’t really understand why anyone should earn less for doing an identical job simply because they are younger.
Most people working in minimum wage positions will contribute to a pension via the auto-enrolment scheme. The legal minimum level for auto-enrolment is 8%, which comprises 5% from personal contributions and 3% from government contributions. This is better than nothing, but will still fall short of doubling the State Pension.
State Pension poverty
With food and utilities always at risk of price increases, it’s likely that relying on the state pension alone could put basic rights like shelter, food and clothing in jeopardy.
Annual earnings for those on the national living wage average just over £15k, so most working people are used to living on close to double the State Pension. In fact consumer magazine, Which? estimates essential food and housing expenditure to be £17,800 per year for a household in retirement.
The bottom line is, the earlier you contribute to a top-up pension, the better off you will be in retirement. Investing in the stock market has proven to be one of the best ways to grow money. A self-invested personal pension (SIPP) allows you to control the specific investments in your pension fund. It’s easy to set one up and can be one of the best ways to grow money for retirement, particularly for the younger, long-term investor.
If you want to have an additional £9,000 per year available to you in retirement for 20 years, then you need a private pension pot of approximately £180,000.
To achieve this, you’d need to save £4500 per year for 40 years, or £375 per month. This is not achievable for many people, but investing in the stock market can help make this a possibility, by the power of compounding interest through share price rises or dividend pay-outs.
Simply put, compound interest means that you can earn interest income on your interest income, accelerating the growth of your pension pot. Therefore, with the right variables in place, I think it’s possible to double your State Pension while on minimum wage, providing you regularly contribute and enjoy the benefits of compounding. But do start early!
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Motley Fool UK 2019