The high cost of living today makes it difficult for many to save so they can make a decent second income for retirement.
Latest data from the Money and Pensions Services shows that a quarter of UK adults have less than £100 in savings. That means an astonishing 11.5m people have little or nothing put aside to achieve financial freedom in their later years.
But for most people there’s no reason to panic, even if they currently have nothing set aside for retirement. The good news is that even those with just a few decades (or less) with nothing in savings still have time to potentially build a large nest egg.
A £23,379 second income
I’m not interested in locking up most of my money in a low-yielding savings account. Rates on both fixed-term and easy-access products are tipped to drop sharply as the Bank of England steadily cuts interest rates. So I’m unlikely to generate significant long-term wealth with one of these.
So I continue to prioritise buying FTSE 100 and FTSE 250 shares with a tax-efficient Stocks and Shares ISA. These UK stock indices have provided an average yearly return of 9.25% in recent decades.
If this record were to continue, someone who starts investing £500 a month in the Footsie 100 and FTSE 250 for 25 years would have made an impressive £584,464.
They could choose from a variety of options to make a passive income at the end of this period. One option could be to draw down 4% of this amount a year for an annual passive income of £23,379.
The 4% rule is a popular one as it ensures a stable level of passive income for about three decades before the retirement pot runs dry.
Building a winning portfolio
Combined with the State Pension, this option could give me a solid overall income to help me live comfortably in retirement.
Past performance is no guarantee that I could make big returns from share investing. And companies on the FTSE 100 and FTSE 250 can be prone to bouts of volatility that dent eventual returns.
However, I can reduce this risk by purchasing companies with records of strong and long earnings growth. I’m talking about ones like Coca-Cola HBC (LSE:CCH) that have multiple revenue streams, vast economies of scale, and significant competitive advantages (or ‘economic moats’, to quote billionaire investor Warren Buffett).
This particular FTSE 100 share bottles market-leading brands including Coke, Sprite and Fanta, which remain in high demand at all points of the economic cycle. The company also operates across multiple drinks categories and geographies, which gives it strength through diversification.
And finally, Coca-Cola HBC has a brilliant track record of product innovation, which gives me even more confidence in its ability to grow earnings. The company has to navigate extreme competitive pressures to thrive, but on balance I feel its strengths outweigh the risks it faces.
That said, I also look for other less-stable shares that offer high dividend yields. This helps me diversify and potentially make bigger returns. Aviva (which now yields 8.1%) and Taylor Wimpey (which has a 6.5% dividend yield) are a couple of other Footsie shares I currently own in my portfolio.
