Many of us (including myself) worry about the level of support the State Pension will offer in retirement. How large will it be, and at what age will I be able to claim it?
In fact, will the State Pension even be around two to three decades from now?
These aren’t worries I’m prepared to sit back and accept while I have time to do something about it. I’m taking steps today to help me become totally financially independent in later life.
Want to see what I’m doing?
Targeting a million
To my mind, saving instead of investing is a major mistake that millions of Britons fall into.
Okay, money put in the bank provides a guaranteed return, and the value of my investment will never fall. The same can’t be said with assets that are traded on the stock market.
Yet cash savings provide the sort of terrible returns that can leave retirees dangerously short of funds. This to my mind is a greater risk, given the strong long-term profits that share investing tends to provide.
Someone who puts £500 a month into a Cash ISA, for instance, would likely have just £216,879 in their nest egg after 30 years. For a Stocks and Shares ISA investor, the amount would be above a million (£1,047,026 to be exact). These numbers are based on Moneyfacts data since 2015.
The Magnificent 7
There are several ways to use retirement savings to make a second income. My plan is to invest in a diversified portfolio of dividend shares providing me with regular cash payouts.
Of course dividends are never guaranteed. But investing in shares spanning different sectors and regions can make one’s income stream more consistent.
I think a strong, seven-stock portfolio could look something like this:
| Dividend share | Sector | Dividend yield |
|---|---|---|
| Phoenix Group | Financial services | 8% |
| Pfizer | Pharmaceuticals | 6.7% |
| iShares Broad $ High Yield Corp Bond ETF | Exchange-traded funds (ETFs) | 7.5% |
| Tritax Big Box REIT | Real estate investment trusts (REITs) | 5.5% |
| Kraft Heinz | Food processing | 6.4% |
| US Solar Fund | Energy | 7.2% |
| Chelverton UK Dividend Trust (LSE:SDV) | Investment trusts | 9.5% |
This collection contains both fixed-income assets (bonds) and a large range of equities. In fact, it provides exposure to more than 70 companies thanks to the inclusion of the Chelverton UK Dividend Trust.
What I like about this trust is its high weighing of UK dividend shares (92% today). While this creates more concentrated regional risk, it also means it’s focused on the most dividend-heavy stock market on the planet.
Chelverton’s holdings span industries as varied as mining, financial services, healthcare, telecoms, and consumer goods. This gives it strength to pay a robust, growing dividend over time — annual payout growth has averaged 6.3% over the last five years.
An investors with a million-pound ISA like the one I described earlier, invested equally across this portfolio could generate a huge annual dividend income of £76,433. That would likely more than make up for any State Pension shortfalls.
