What kind of passive income could those over 50 stand to earn? A recent article from The Times revealed one answer: it depends where you’re from! Those over 50 in the UK have an average pension pot of £42,600, whereas a similar cohort in the US has an average of £365,500!
Leaving aside the myriad differences between the two countries in terms of investing (and everything else…), the smaller UK figure is a strange one. It seems like a smallish lump of cash to be earning the big money, but it could end up in a passive income of £7,758. Here’s how.
Optimism
One of the biggest differences between British and American investors is the appetite for risk tolerance. I don’t think it’s a stretch to say that many Brits hate the idea of losing money on an asset. This is exemplified in the choices we make in our ISAs – around 40% have a Cash ISA (no risk of losing money) whereas only 16% have a Stocks and Shares ISA (lots of risk of losing money).
The reality is: all investors in the stock market lose money. One stock I own is the owner of Guinness and other drinks brands Diageo. The stock is down 40% in the last couple of years. I’ve lost nearly half the money I had in it.
Am I bothered? Well, yes. Quite a lot, actually. It’s really a bit annoying. But I accept that it comes with the territory. And because my portfolio is well diversified across many other great businesses, I’m actually well up over the same period.
What kind of businesses are good to invest in? One stock I’m optimistic about at the moment is Aviva (LSE: AV.). The insurance giant is up 21% in the last year, helped along by a great year for the FTSE 100 index.
Established FTSE 100 companies with large brand name recognition might be a great place to start for passive income seekers. Everyone knows the name Aviva – and has probably seen a million of their adverts with Paul Whitehouse! Investing in a household name with a £20bn market cap might ease some worries about losing money.
Real magic
Another factor in the firm’s favour is having one of the best dividends going. Current forecasts expect a 6.24% yield over the next 12 months and increases in the years thereafter. On the £42,600 pot, that would churn out into a £2,658 yearly passive income – although it is advisable to spread out investments across a number of stocks for safety.
At the same time, any would-be investors still have to weigh up the risks here. The risk of autonomous (self-driving) vehicles could put paid to its motor insurance division. If these driverless cars are a success when they hit London this year, then the the shares could depreciate.
The real magic, as any investor will tell you, is in the compound interest. If we had 15 years to let the nest egg grow through saving and reinvesting, then we could be looking at serious income. Using 9% returns, including all dividends and share price growth, the £42,600 could turn into a pot of £155,169. A 5% dividend return from this nets £7,758 passive income a year. Not too shabby!
