According to trading platforms provider IG, the FTSE 100, the index of the UK’s largest public companies, delivered an annualised total return of 7.75% between 1984 and 2019. That figure includes the gains from dividends as well as from movements in share prices.
And I’d target future gains from the FTSE 100 when aiming to build a retirement pot of money to supplement my State Pension.
How I’d aim to double the State Pension
The full new State Pension is worth £179.60 per week. And that means to double that amount of retirement income, I’d need to build a fund capable of paying me an income of £9,339.20 a year.
One way of getting that sum every year could be to put some money in an index tracker fund and collect the dividends. And right now, the FTSE 100 is yielding about 3.2%. So if I put £291,850 in a FTSE 100 tracker it would provide me with a dividend income of around £9,339.20 each year.
Of course, dividend rates will likely vary from year to year, but I reckon the sum of £291,850 is a decent sum to aim for if I want to double my State Pension.
One way of building up the money over a working lifetime could be to save regularly into a FTSE 100 index tracker. And by making sure all dividends were automatically reinvested, I could compound my gains while building up the investment pot.
Using the 7.75% total return figure as my expectation, an online compound interest calculator tells me I’d end up with enough money after about 43 years. That’s if I keep investing £2.50 every day into the tracker.
Variations and seeking higher returns
In reality, I’d invest the money monthly when my wages arrive. So every month, I’d send around £76 to my FTSE 100 tracker investment. And I’d need to increase that amount every time my income increases. And that way, my eventual pot of money will likely keep ahead of the eroding effects of inflation over the years.
In practice, my illustration is too simplistic. The outcome will likely vary from what the figures suggest. For example, dividends can change over the years and so can the total returns from the index. But I do think the illustration is useful because it shows what can be possible from investing a small amount of money and compounding gains over a long period of time.
My investment strategy follows the principles of this illustration but with some enhancements. For example, I don’t invest only in the FTSE 100 index. I’m also following foreign indices, such as America’s S&P 500 in the pursuit of higher annualised returns.
And on top of that, I invest regularly in the shares of individual businesses after carrying out thorough research. But there are no certainties or guaranties that my returns will be positive. And it’s worth me bearing in mind that all shares carry risks. Nevertheless, I’m looking forward to a wealthier retirement than I might otherwise have endured with just the State Pension.
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Kevin Godbold has no position in any of the shares 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.
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