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Times are tough, and the amount that Britons are saving each month towards a second income in retirement is worryingly low.
A whopping four-in-10 of us are under-saving for retirement, according to the Department for Work and Pensions (DWP). That’s based on the target replacement rate (TRR), which is the proportion of pre-retirement earnings (averaged between age 50 and State Pension Age) “an individual would need to replace to meet an adequate income in retirement, as set out in the Turner Commission.” That’s assumes individuals will convert the full value of their defined contribution pension pot into an annuity.
That equates to 14.6m people with not enough in their retirement pots.
Another DWP projection shows just one-in-four adults are on course to a ‘comfortable’ retirement, as described by Pensions UK. This would mean annual incomes of around £43,900 for a single-person household, and £60,600 for a couple.
As I’ve said, we’re still in the middle of a cost-of-living crisis. This makes saving for retirement tougher than usual. Yet even those saving below the national average can build a sizeable pension over time.
How much is needed each month?
According to Shepherds Friendly, the average amount people have to save or invest each month is £514. If they can harness the full power of the stock market, and are willing reinvest dividends for the full compounding effect, that’s a decent wad of cash to put to work.
I think a 9% average rate of return is achievable (but not guaranteed) with a diversified portfolio of global shares. Based on that, someone who invests for 30 years could have built up a pension pot of £457,686.
If invested in 7%-yielding dividend shares, that would then mean an annual second income of £32,038. Added to the full State Pension, which is currently £11,900 and likely to rise over time, I believe our investor would have achieved more than what Pensions UK deems necessary for a single person to achieve a ‘comfortable’ retirement.
However, that’s not based on that £514 I mentioned above. Our calculation is based on a £250 monthly investment, less than half that amount. It underlines the incredible wealth-building potential of the stock market.
Targeting a large passive income
This is why I invest most of my extra cash each month in global stocks in a Self-Invested Personal Pension (SIPP) and Stocks and Shares ISA.
We don’t need to put in the time and effort of picking individual shares to make a large return either. A trust like the JPMorgan American Investment Trust (LSE:JAM) uses the expertise of seasoned fund managers to help investors build a large retirement pot.
As its name implies, this particular investment trust holds a basket of US shares (276 in all). These are spread across many industries, reducing risk and offering exposure to a range of growth and income possibilities.
| Stock | Sector | Weighting |
|---|---|---|
| Microsoft | Information technology | 7.4% |
| Amazon | Consumer technology | 5.7% |
| Nvidia | Information technology | 5.4% |
| Meta Platforms | Communication services | 4.4% |
| Broadcom | Information technology | 3.9% |
| Capital One | Financials | 3.3% |
| Kinder Morgan | Energy | 3% |
| Apple | Information technology | 3% |
| Loews | Financials | 2.9% |
| Berkshire Hathaway | Financials | 2.8% |
Its focus on Wall Street equities means greater geographic risk than more globally-allocated trusts. But it also allows it to harness the long-term strength of the US stock market.
Since 2015, the JPMorgan American Investment Trust has delivered an average annual return of 16%. That’s far above the 9% our investor in the example above is targeting. And if it continues, someone investing £250 a month could create a significantly larger portfolio over 30 years (one worth a stunning £2.2m, in fact).
