How will you fund your two extra years?
This week came news that we're all not only living longer, but also enjoying longer healthier lives, as well. According to the Office for National Statistics, our collective healthy life expectancy increased by over two years in the period 2008-2010 compared with 2005-2007.
Which is good news, of course. In our old age, we'd all like to be active and healthy, rather than a sickly bed-ridden occupant of a nursing home.
And that old age should last far longer than seemed possible even a decade ago. If the latest mortality rates continue, reckon pension experts, a man of 65 retiring today could expect to live to 91, three years longer than the typical current estimate of 88. Females should live even longer.
You don't need me to tell you the downside of all this. As a nation, our savings and pension investments are going to have to support us for longer.
Back in 2008, points out Tom McPhail, head of pensions research at Hargreaves Lansdown (LSE: HL), a 65-year old man seeking an annuity with a five-year guarantee could expect pension savings of £100,000 to generate an annual income of £7,800 or so. Today, that figure is £5,591 -- and continuing to head south.
Annuity rates were cut 14 times in July, he points out, with a further nine cuts in the first three weeks of August. What's more, he adds, with the European Union's Gender Directive taking effect on 21 December, further cuts are expected -- irrespective of what happens to gilt yields.
My own solution to all this is one shared by many astute investors. Yes, I've an occupational pension; and yes, I've a decent slug of money stashed in a SIPP.
But I'm also squirrelling money away in an ISA.
ISA versus SIPP
I'm not, at this point, going to debate the 'ISA versus SIPP' issue. Each has their merits; choose the solution appropriate for your own circumstances.
- A low-cost stocks and shares ISA offers tax relief on income, and provides ready access to your money should you need it prior to retirement. There's no obligation, either, to buy an annuity.
- A low-cost SIPP, on the other hand, offers tax relief on contributions, currently at your highest marginal rate -- which is especially attractive if you're a higher-rate taxpayer now, but likely to be a basic rate taxpayer in retirement.
What's more important -- much more important -- is what you put inside those pension wrappers, after first ensuring that the wrappers themselves are as cost-effective as you can make them.
And in my low-cost stocks and shares ISA, I'm building up a clutch of decent dividend-paying blue-chips.
Among the posters on our popular High Yield Portfolio discussion board, there won't be too many raised eyebrows at the sort of shares I'm buying -- and have been buying, for close to a decade.
In short, I'm looking for shares that meet six tests. I want:
- Members of the FTSE 100 (UKX) index, rather than small-cap minnows.
- High-yielding shares -- at least the FTSE 100 average of 3.7%, and hopefully half as much again. But not too high, either, as that might portend a dividend cut.
- Decent dividend cover, too -- ideally around 1.7 to 2.3, although some shares have good reasons for maintaining dividend cover outside this range.
- A decent history of raising dividends over time.
- No nasties lurking in the accounts -- high levels of net debt, pension deficits and so on.
- A price-to-earnings (P/E) ratio that signals that you're getting all this at a reasonable price.
What sort of shares pass most or all of these tests? Take a look at three that do the business today.
Royal Dutch Shell (LSE: RDSB) offers a forecast yield of 5.0%, and trades today on a P/E of 8.0 -- well below the FTSE's average of 11. Operating over 30 refineries and chemical plants, and 43,000 retail filling stations in 80 countries around the world, Shell to me looks a safe bet to keep on pumping out dividends during my retirement.
GlaxoSmithKline (LSE: GSK) trades today on a P/E of 11.5, and offers investors a forecast yield of 5.4%. Employing around 99,000 people and manufacturing almost four billion packs of medicines and healthcare products every year, it's also a consumer business with a robust collection of strong brands: Ribena, Horlicks, Lucozade, Aquafresh, Sensodyne, Panadol, Tums, Zovirax -- and, of course, the Macleans range of toothpaste, mouthwash and toothbrushes. Like Shell, Glaxo looks a safe long-term bet.
SSE (LSE: SSE) is one of just five FTSE 100 companies to have delivered a real dividend increase every year since 1999. A UK-based energy supplier, it delivers power to around 3.7 million homes, offices and businesses, and is also the UK's second largest electricity generation business. Throw in the UK's largest onshore gas storage facility, and a 50% share of Scotia Gas Networks, which has around 75,000km of pipelines delivering gas to around 5.7 million homes and businesses, and you've got a sizeable business. Trading on a P/E of 11.3, SSE is on a forecast dividend yield of 6.5%.
As it happens, über income-investor Neil Woodford -- who looks after two of the country's largest investment funds, and runs more money for private investors than any other City manager -- counts one of these three shares among his very largest holdings.
Which one? Its name is revealed in a special free report from The Motley Fool --‑ “8 Income Shares Held By Britain's Super Investor” -- which profiles no fewer than eight of his largest holdings, and explains the investing logic behind each one. The report is free, so why not download a copy?
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> Malcolm owns shares in GlaxoSmithKline and SSE, but does not have an interest in any other shares listed. The Motley Fool owns shares in Hargreaves Lansdown.