If you’re getting close to retirement age but don’t have any savings, then you may be starting to worry.
The good news is that it’s not too late to invest your spare cash for your retirement. In this article I’ll explain how I’d use the stock market to build a second income stream.
Cash ISA? Forget it
You may be thinking about a Cash ISA but I wouldn’t bother. Best-buy Cash ISA rates are about 1.5% at the moment.
To generate a meaningful income from this kind of interest rate, you’d need a lot of cash. I estimate you’d need about £333,3333 to generate £5,000 of interest each year. If you had that much spare cash, you probably wouldn’t be reading this.
Although I think it’s very important to keep a cash savings fund for rainy days, to generate an attractive income I think you need to consider other options.
The plan I’m considering should pay at least 5% each year, in cash.
What I’d do
I’ll start with the hard part. If I was hitting 60 with no retirement savings, the first thing I’d do would be to see whether I could cut down my spending. Any money saved now will boost your spending power when you stop work.
I’d invest as much spare cash as possible in the stock market. But I’d be very selective about where I put it.
You may have heard stories about investors in small growth stocks who’ve tripled their cash in a few years. Or lucky investors who’ve got rich from takeover bids. That’s all possible, but the reality is that many more people lose money attempting to repeat these successes.
Even if you make the right choices, you often need to be able to leave your investment untouched for years, in order to enjoy the big wins.
If you’re approaching retirement, I don’t think this is a suitable approach. Instead, I’d focus my efforts on generating an above-average income and making sure that I was able to sell investments and withdraw cash if I needed to.
Boring is best
In my view, the best way to achieve these goals is to buy big dividend-paying stocks from the FTSE 100. I’m talking about boring businesses that chuck out a reliable stream of cash each year, and aren’t too expensive to buy.
Although I’m not 60 yet, I own quite a few of such shares myself. Instead of withdrawing my dividend cash, I just use it to buy more shares, building a bigger income for the future.
What would I buy?
Among the companies I own and would buy today are insurance giant Aviva (8% yield), telecoms giant BT (7.6% yield), television group ITV (7.2% yield) and oil and gas giant Royal Dutch Shell (5.8% yield).
Other companies from my own portfolio include packaging group DS Smith (5.3% yield) and pharmaceutical group GlaxoSmithKline (5.1% yield).
These payouts aren’t guaranteed, but in my view they should be fairly safe. Similarly, the value of these shares will rise and fall over time. But taken together, I believe a portfolio of 10-20 companies like this will provide a good income, while making it easy to sell shares in the future, if you need to.
One final tip? I’d protect my investment from tax by keeping it in a tax-free Stocks and Shares ISA.
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Roland Head owns shares of Aviva, BT GROUP PLC ORD 5P, DS Smith, GlaxoSmithKline, ITV, and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended DS Smith and ITV. 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.