“I’m already 60 and don’t have a penny saved, so surely I’ve left it too late?” That’s something some of you might say and I’m not going to glibly tell you I know the way to retire to a life of luxury overnight. No, you have to face the reality that things are going to be tougher for you, and you should probably put aside any thought of retiring at 65.
Work longer
Push forward another five years, focus your retirement sights on your 70th birthday, and you still have a full decade to improve your financial outlook. Assuming my health holds up, I’ll keep working as long as I can, because I enjoy what I do (and I’d be researching investments anyway, so I might as well get paid for it). You might not have such a fun work-at-home job as me, but thousands every year are staying on at work past State Pension age and enjoying it.
I’d say the investment strategy that’s likely to get you the best return over the next 10 years is buying shares in UK companies, in a Stocks and Shares ISA and definitely not a Cash ISA. I usually suggest shares if you have an investment horizon of at least that long, and point out that people often move their money increasingly away from shares as they get closer to their end date in order to lower the risk.
A bit more risk
With just a single decade to invest, however, I think you’d need to take a bit more risk and stick with shares for the duration. But I reckon you can lower the risk by going for top dividend-paying shares — it’s share prices themselves that tend to be the most volatile, while the best companies keep on paying out dividend cash every year, regardless of where their share prices go.
Right now, the FTSE 100 is on a forecast dividend yield of 4.8% for the full year, and that includes all the low dividends and the companies paying none. If you go for shares paying good dividends, spreading your choices across sectors for a bit of diversification, I reckon an overall target dividend yield of at least 6% is well within reach.
I’d also expect share prices to keep pace with inflation as a minimum, so let’s add 2% for that and aim modestly at 8% per year. Now, the FTSE 100 hasn’t quite matched that over the long term, but the FTSE 250 has been running ahead of it, so spreading your cash across the two could swing your balance.
How much?
Can you invest £500 per month? If you can, over 10 years at a total rate of return of 8% per year (and all dividends reinvested), you could be scratching a 70-year old head with almost £91,000 in your investment pot — and if it’s in a Stocks and Shares ISA, none of it will be taxable.
If your investments are still in shares paying dividends and you carry on achieving 6% yields, that would provide you with £5,460 per year in income (with the capital left to grow and provide for future years). If that doesn’t sound like a lot, it’s an extra 62% on top of your State Pension of £8,767 per year. And that’s got to be worth having.
