I’m increasingly doubtful that the State Pension will give me enough money to retire on. But I’m not panicking. I’m building a portfolio of growth and dividend stocks to help me live in comfort in my later years.
Finding enough cash to invest is tougher than usual as the cost of living goes up. However, past performance of UK shares means that I may not need to spend colossal amounts each month to set me up for retirement.
History is not always a reliable guide to future returns. But the profits British stocks have generated deserve serious attention in my book. They suggest that even those who begin their investing journey late have a chance to build up a healthy cash pot.
Why I invest
There’s plenty of bad news out there right now. So I want to focus on the positives and explain how share investing can create financial empowerment. But before I do, it’s worth explaining how a failure to take action today can create trouble later on.
A report from Scottish Widows shows that more than a third (35%) of Britons will have “less than the minimum needed” to survive in retirement. It said that the average man will have £19,000 in retirement income per year. The average woman will have £12,000, it found.
Scottish Widows also said that just 36% of people are on course for a “comfortable” lifestyle in retirement. It prompted head of policy Pete Glancy to comment that “our new national retirement forecast paints a stark picture – one in three of us are facing the harsh reality of a retirement where we will struggle to make ends meet”.
The tragedy is that many of us have an opportunity to avoid pensioner poverty by regularly investing. There are many assets available for people to invest in right now. But my personal preference (based on my attitude to risk and return) is to park the majority of my cash in UK shares.
An £18,305 passive income!
Over the long term London-listed equities have provided (with dividends reinvested) an average annual return of around 8%. So I keep some spare money in savings accounts for a rainy day, and use almost all of the rest to buy stocks in a Stocks and Shares ISA.
Some quick arithmetic shows how that 8% can generate life-changing returns. Thanks to the miracle of compounding, even those late to the investing party can make a healthy retirement income.
A 40-year-old who spends £400 each month in UK shares (and reinvested any dividends) could, by the time they reach their State Pension age of 68, have made around £457,626.
If they then withdrew 4% of that pot each year it would provide a yearly passive income of £18,305. And they’d have a State Pension on top of that to boost their bank account.
By buying in a wide range of stocks across sectors, investors can reduce risk and stand a better chance of hitting that magic 8% annual rate of return. I’m confident this strategy will help me eventually enjoy a comfortable lifestyle in retirement.
