The State Pension – at just over £8,500 per year – is not a lot of money on its own. The truth is, that amount of money is unlikely to be enough to live a comfortable lifestyle in retirement. This is due to the fact that once you factor in basic living expenses such as housing, food, and transport, there’s not likely to be much, if any, left over to spend on non-essentials.
To make matters worse, there are millions of people across the UK who don’t even qualify for the full State Pension amount, due to the fact they were ‘contracted out’ in the past – often without realising the implications – or don’t have enough ‘qualifying years’ on their National Insurance record. Forget a payout of £164.35 per week, plenty of people only qualify for amounts of £120-£130, or even less.
Finding out that you’re not entitled to the full State Pension (you can find out how much you’re entitled to on the Check your State Pension page of the gov.uk website) can be a shock. No one wants to spend retirement counting their pennies and struggling to make ends meet. However, a reduced State Pension payout is also not the end of the world. There are definitely strategies that can be put in place that can bring in some extra income on a regular basis, which could offset any reduction to the State Pension payout. The key, as always, is to start planning early.
Cash flow for doing nothing
One of the easiest ways to generate passive income (income for doing nothing) is by investing in dividend stocks. These are companies that pay out a proportion of their profits as cash payments to shareholders on a regular basis. With a portfolio of dividend stocks, it’s possible to build up a nice little passive income stream, and for this reason, dividend investing is a very popular strategy among retirees.
£1,800 per year
The beauty of dividend investing is that it really is quite simple. In the UK, there are hundreds of excellent dividend stocks listed on the London Stock Exchange – many of which offer high yields – meaning it’s super easy to put together a portfolio of companies that can generate a healthy income for you.
For example, consider a five-stock portfolio of Royal Dutch Shell, British American Tobacco, Lloyds Bank, Legal & General, and GlaxoSmithKline. Analysing the yields on these stocks, a mini portfolio of these companies currently yields around 6%. That means that with an investment of, say, £30,000, you could be looking at dividend income of around £1,800 per year, or £35 per week. This would certainly help offset a reduced State Pension payout and help you live a more comfortable lifestyle in retirement.
Finding out that you’re not entitled to the full State Pension can be discouraging. However, there are definitely strategies that can boost your income in retirement by providing you with a passive income. Dividend investing is one such strategy that could be worth considering.
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Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group, Legal & General Group and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. 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.