How I’d invest £250 per month to aim for a £10,600 second income

Stephen Wright doesn’t want to rely on the State Pension to fund his retirement. Instead, he’s looking to earn a second income by investing in dividend stocks.

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I think investing £250 per month in dividend stocks could help me earn a second income of £203.85 a week, or £10,600 a year. That’s currently the amount of the full UK State Pension.

I’m set to reach State Pension age in 2056. But I’m not sure what will happen between now and then, so I think it’s worth building my own retirement fund, just in case there are any significant changes.

The UK State Pension

Relying on the State Pension to fund my retirement looks risky to me. Put simply, I’m doubtful that the UK economy will be in a good enough position to meet the government’s pension commitments.

One reason for this is an ageing population. As people continue to live longer, the number of retirees eligible for public support increases, making pension obligations more expensive. 

Another is inflation. Pensions are currently protected against the rising cost of living, but the Bank of England’s 2% inflation target means the cost of this promise is virtually guaranteed to increase each year.

I’m wary this might mean a rise in the State Pension age might be on the cards. If this happens, I might not be eligible in 2056, so I’d have to reconsider a plan of relying on the state for income 33 years from now.

In any event, though, it’s out of my control. Neither the state of the economy nor government policy is up to me, so counting on the State Pension involves putting my financial future in someone else’s hands.

Investing in the stock market

I’m therefore looking to build my own infrastructure that will be able to support me in retirement. My ambition is to build a portfolio of dividend stocks that I can use for income 33 years from now.

To get started today, I’d think about buying shares in Lloyds Banking Group, Kraft Heinz, and Primary Health Properties. None of these is entirely risk-free, but they all look like good value to me right now.

More importantly, each has a dividend yield over 5%. If I can invest £250 per month for the next 33 years and earn a 5% return, I’ll have built a portfolio generating £10,900 in passive income by 2056.

The average return from the FTSE 100 over the last 20 years has been just under 7%. So even if returns are lower over the next few decades – as I suspect they will be – a 5% return looks realistic to me.

Furthermore, investing via a Stocks and Shares ISA would mean I won’t have to pay tax on my gains or income. And I’ll be able to withdraw them in 2056 even if the retirement age has gone up.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Taking control

Investing £250 per month in dividend stocks could provide me with meaningful passive income in retirement. This would help me limit the risk of relying on the state 33 years from now.

If things do work out and the State Pension infrastructure is still intact, that’s great too. I’ll have my dividends as a second income to enjoy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Kraft Heinz and Primary Health Properties Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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