If you’ve got retirement on your mind, no matter whether it’s 30 years or three years away, you can make passive income to make that switch to a quieter life a little more enjoyable.
Money doesn’t rule the world. All you need is love, if you believe the Beatles. But it does make life a little easier. As legendary Wall Street journalist Louis Rukeyser said: “The best way to keep money in perspective is to have some.”
The State Pension will only offer £8,700 a year or thereabouts. It’s not even enough to keep you in tea and biscuits. Instead, I make my passive income by drip-feeding £250 a month into a Stocks and Shares ISA.
I think this a good starting level. Depending where you are in your career and how stable your finances are, you may have a little more, or you may have a little less. It’s not so onerous that I have to dip into it and sell companies that are underperforming in the short term.
You can put up to £20,000 a year in a Stocks and Shares ISA and any gains you make are tax-free.
A mix of high-yield dividend-paying shares like Aviva or Legal & General will offer you solid income and you can compound your benefits if you re-invest the dividends. Add a few defensive, slow-and-stable growth picks and your passive income portfolio should see you right to a happy retirement.
Work into your 70s?
The Department for Work and Pensions was forced to respond to a recent report by the right-leaning Centre for Social Justice urging that people work into their mid-70s. Unsurprisingly, this kicked off a furious backlash. The DWP came out strongly against the proposal with a spokesperson batting down the suggestion. “We will not be raising the State Pension age to 75. Fact. This is not government policy and we have no plans to do so,” they said. So that’s that. Or is it?
It’s no secret the world is facing a demographic time-bomb. Everyone is living longer and birth rates are declining across the West. So the concept of pensions is perhaps one that only baby boomers will recall fondly. Many final salary pension schemes have closed in recent years as employers struggle to manage costs and fewer than 20 FTSE 100 companies now offer these lucrative end-of-work benefits to their employees.
Whether you’re slogging away in an office job and waiting for the moment when you can put two fingers up to the boss and skip away scot free, or you’re self-employed and working every minute God sends to gain financial independence, protecting yourself by making passive income from a Stocks and Shares ISA makes a lot of sense.
What to buy
If you make a note of what the best-performing UK fund managers are buying, you’ll see they like market-leading companies that generate lots of free cash flow to pay out stable dividends that are well covered by earnings.
The questions you need to ask yourself when you’re doing research are these: Is the company profitable? Is the outlook positive? Are its earnings per share and dividends improving? Is there room for more growth in the future?
If the answers are yes, it’s likely a good choice.
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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.