The UK State Pension’s getting increasing attention, and not for good reasons. With the long-term sustainability of the triple lock under growing scrutiny, many investors are prudently taking steps to become less dependent on the government for retirement income.
But how much does a 40-year-old actually need to save each month to match what the State Pension currently provides?
The maths of replication
At the current rate of £12,547.60 a year, replicating the State Pension through a portfolio requires roughly £313,690 saved. At least, that’s how large a portfolio needs to be when following the 4% withdrawal rule.
Let’s assume a portfolio matches the UK stock market’s long-run 8% average return a year with a low-cost index tracker. If the goal is to retire at 65, a 40-year-old today would need to invest around £330 a month, which would steadily compound into £313,838 after 25 years.
That’s a pretty straightforward strategy to target better financial security in retirement. But sadly, it may not be enough. And this is where stock-picking can come to the rescue.
A decade of exceptional compounding
Instead of index funds, investors can craft a custom portfolio of individual stocks to try and accelerate the compounding process drastically. And perhaps a perfect recent example of this in action is Morgan Sindall Group (LSE:MGNS).
The FTSE 250 construction and infrastructure services business has delivered a staggering annualised total return of around 25% over the last decade. That means anyone who’s been drip feeding £330 each month is already sitting on £172,237 today. And if Morgan Sindall shares maintain their current pace for just another two and a half years, that portfolio will grow to £333,285.50.
That’s enough to more than replicate the State Pension in half the time, with another 12.5 years of compounding left to go before retirement comes knocking!
So is Morgan Sindall still worth backing today?
In its latest (April) trading update, management confirmed that full-year profits are expected to be significantly ahead of previous expectations, driven by strong trading across its Construction and Fit Out divisions.
Digging a little deeper, Fit Out profits are set to exceed the top end of the £80m-£100m medium-term target range, and its Construction operating margin is forecast at the top of its 3%-3.5% target range with revenues approaching £1.4bn.
That’s obviously a positive sign for new and existing shareholders. But there are some weak spots. Sadly, near-term consumer sentiment remains subdued due to broader macroeconomic uncertainty. And while private housing sales have improved modestly year on year, the Partnership Housing division’s profit contribution’s expected to show only modest growth from the £42m delivered in 2025.
This is obviously a cyclical headwind. But if interest rates stay elevated for longer, or confidence among homebuyers deteriorates further, Morgan Sindall’s most capital-intensive division could remain a drag on overall returns for some time, preventing the shares from continuing to thrive.
The bottom line
Morgan Sindall won’t be the right fit for every investor. But for those looking to build a retirement income that goes well beyond the State Pension, the business does look quite compelling.
That’s why I’m already considering it for my own retirement portfolio. And it’s not the only UK stock I’ve got my eye on…
Should you invest £5,000 in Morgan Sindall Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Morgan Sindall Group Plc made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
