If you’re approaching retirement age and you have a low amount of savings (or perhaps even none at all), the thought of living off the State Pension in retirement probably worries you.
Currently, the State Pension payout is just £168.60 per week – assuming you qualify for the full payout, which many people don’t – which equates to less than £9,000 per year. That’s not enough even for a basic lifestyle these days. According to the Pensions and Lifetime Savings Association (PLSA), individuals retiring today need at least £10,200 per year to be able to live a ‘minimum’ lifestyle.
If you plan ahead though, and start building up passive income streams while you still have time, you could put your State Pension concerns to rest. With that in mind, here’s a look at three easy ways to build up extra income for retirement.
Funds that pay dividends
One of the easiest ways to build up income for retirement is to invest in a fund that pays dividends. You can find these kinds of funds on investment platforms such as Hargreaves Lansdown, AJ Bell, and Interactive Investor.
There are a number of advantages to investing in funds for income. First, it’s less stressful than picking income stocks yourself as an investment manager does this for you. Second, it’s generally a lower risk strategy than buying individual stocks, because funds tend to be well diversified. Third, you can get started with a very small amount of money. For example, through Hargreaves Lansdown, you can start investing in funds with just £100.
Overall, funds can be a very effective way of generating extra income for retirement.
Investment trusts that pay income
Investment trusts that pay dividends are another option to consider if your goal is to build retirement income. Investment trusts are similar to funds, however, they are traded on the stock exchange like regular stocks.
Like funds, investment trusts take a lot of the stress out of investing. They also provide diversification. However, an added advantage is that many have low ongoing charges, which can make them more cost-effective in the long run.
On the downside, you do have to pay trading commissions when you buy an investment trust. So they may not be ideal if you’re only looking to invest a few hundred pounds here and there.
Finally, investing in individual dividend-paying companies is another strategy that could be worth considering. The advantage of this approach is that you have more flexibility in terms of your investments.
For example, if you want to capitalise on Royal Dutch Shell’s big dividend yield (currently about 7%) you can buy Shell shares. Similarly, if you like the look of Aviva’s colossal dividend yield (around 8% currently) you can pick up some Aviva shares.
Of course, with this approach, there’s a higher level of company-specific risk. So you’ll want to diversify your money over many different companies in order to lower your overall investment risk. You’ll also have to factor in trading commissions.
I wouldn’t let these issues put you off though. Given the attractive dividend yields on offer from many FTSE 100 companies right now, this approach to retirement income generation can be very rewarding.
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Edward Sheldon owns shares in Hargreaves Lansdown, Royal Dutch Shell and Aviva. The Motley Fool UK has recommended Hargreaves Lansdown. 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.