The £42,456 dilemma! Are you doing enough to earn a second income in retirement?

Ever wondered how much you’ll need for an adequate second income in retirement? There’s no exact way to calculate this, as our personal circumstances and goals can change. Who’s to say how quickly living and social care costs will rise in the coming decades too?

It’s important to have a rough amount in mind though. That gives you and I a target to work towards, and helps establish whether we’re saving or investing enough to achieve the passive income we want.

Wealth manager Mattioli Woods and YouGov have worked together to ascertain how much the average Briton thinks they’ll need “to feel financially secure and live comfortably in retirement“. The amount? A cool £42,456 a year after tax.

The question is, are you saving or investing enough to hit this target?

Thinking about returns

The answer depends on more than simply how much you’re setting aside each week or month. It’s based on other factors too, like:

• How long you have until you plan to retire.
• Whether you’ll be entitled to the full State Pension.
• If you already have savings and investments.
• Where you put your extra cash to generate returns.

All of these factors are important. For now though, I’m going to concentrate on the final one: how to put your cash to work. The reason? Due to poor returns, millions of Britons jeopardise their chances of retiring comfortably, regardless of their personal circumstances or goals.

Turning £500 into £42k+

People often think regularly saving in a low-yielding account will give them enough cash for retirement. It may indeed work for some. But research shows that many more mistakenly think they’re earning enough interest, only to find their nest egg’s too small.

Let’s say you put £500 at the end of each month in a savings account. If you can get an interest rate averaging 3% over 30 years, you’ll have made £291,368. Based on a drawdown rate of 4% each year, that would supply a second income of just £11,654, creating a huge problem

Even combining the State Pension would likely leave you well short of that £42,456 goal.

Here’s what I’m doing

This example shows why I split my extra money between investing in the stock market and saving. With an former’s average annual long-term return of 9%, I feel I’d be foolish not to.

Let’s say I put my split my cash between and investing and saving to achieve an 8% over 30 years. With a £500 monthly injection, I’d have a retirement fund of £745,180.

This would be enough to generate a £29,807 second income, based on a 4% drawdown. And with the State Pension added in, I believe that would get me above my goal.

A FTSE 100 opportunity?

Buying individual shares is an excellent way to target retirement wealth. But an exchange-traded fund (ETF) can also generate huge returns and provides instant diversification to spread risk.

Take the iShares FTSE 100 ETF (LSE:CUKX). While it can fall in value when the broader stock market declines, over time, it’s proven a great way to build big returns through UK blue-chip shares. With dividends included, it’s delivered an average annual return of 12.3%.

I own several FTSE 100 shares, such as HSBC, Diageo and Legal & General. And funds like this offer even more exposure, making them worth serious consideration if you’re building a second income for retirement.

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Royston Wild owns shares in HSBC, Diageo and Legal & General.