Saving for retirement is a scary subject. It’s hard to be sure how much we’ll need to live on in 20-30 years’ time.
With such fear and uncertainty, alternative assets promising big riches can be tempting. Gold is a good example. The price of the yellow metal has risen by 20% over the last year. Over the same period, the FTSE 100 has gained just 2.5%.
What if gold keeps rising and the stock market keeps moving sideways? Not owning gold could be a costly mistake.
Know this about gold
It’s possible that gold will rise further. But there are no guarantees. And I think it’s worth remembering that despite its comforting sense of value, gold has some limitations.
Gold will never grow or provide an income. You can only make money from gold by buying low and selling high. In the meantime, you must pay someone to store it or run the risk of storing it in your own home.
I prefer to put my spare cash into the stock market, where I can gain exposure to companies that deliver real growth and pay cash dividends. If I want to exposure to the gold price, then I invest in gold miners that pay cash dividends.
My plan to double the State Pension
I hope that my investments provide me with an extra income when I retire. I don’t want to have to rely solely on the State Pension, which is currently just £8,767.20 per year.
My strategy is to build a retirement fund that will provide me with an income on autopilot after I retire. For me, this means investing in high-yield income stocks from the FTSE 100 and FTSE 250, where dividends are a key focus for management.
In the future, I expect my portfolio to generate a dividend yield that’s significantly higher than the 4% withdrawal rate used for retirement budgeting by most financial planners. This should help to reduce the amount I need to save before I can retire.
For example, to generate an annual income of £8,767.20 using a 4% withdrawal rate, I’d need a fund of £219,180.
But if my dividends provided a yield of 6% per year, I would potentially only need a fund of £146,120. In practice, I’d want a bit more to allow for the risk of dividend cuts, but I’d still need less.
Early results are promising
This approach won’t suit everyone. But so far, it seems to be working well for me. For example, my Aviva shares are now generating a dividend yield of 10% on my original investment.
Not all of my stocks have such high yields. But at current prices, the shares in my Stocks and Shares ISA have an average forecast yield of about 6.5% for the current year.
How to get started
My approach is quite simple. I’ve built a portfolio of about 20 FTSE 100 and FTSE 250 dividend stocks, mostly with dividend yields above the FTSE 100 average of 4.5%.
At the moment, I use all of my dividend income to buy more shares. But when I’m ready to retire, I’ll start withdrawing this income.
I hardly ever sell shares. As long as I expect the company to remain a dividend payer, I’ll continue to own the stock. And that’s it.
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Roland Head owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. 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.