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Are you nervous that you may run out of money in retirement?

Many people approaching retirement age are worried about outliving their savings… and their concerns may have some basis. We frequently see news headlines and reports that many Britons don’t have the savings they think they’ll need to retire comfortably.

Today, I’d like to discuss how you can ensure your golden years may indeed be more comfortable than you now think.

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With longevity come challenges

The good news for many of the world’s developed economies is that their citizens are living longer. But a long life also requires enough savings to ensure a financially comfortable retirement.

And according to the recent study ‘Investing in (and for) Our Future’ by the World Economic Forum, British pensioners will, on average, outlive their pension savings by about 10 years.

The report found that men retiring in the UK were expected to run of money 10.3 years before they died. Female British pensioners can expect to outlive their pension pots by 12.6 years.

In other words, we’re facing a serious retirement savings gap. And retirement needs a plan that makes it possible to be better prepared for the future.

Reinvesting dividends

Most of us realise that relying only on the State Pension for retirement income isn’t viable as the benefits just don’t cut it. The full amount Britons can expect from the government is currently less than £9,000 a year and not everyone actually qualifies for that amount. 

One popular strategy for building a retirement fund involves buying top-quality dividend stocks and using the dividend income to acquire more shares. Dividend reinvesting sets off a compounding process and over time, initial investments can grow to be significant savings.

As one of the highest-yielding markets in the world, the FTSE 100 index currently has a generous dividend yield of 4.5%. Any capital gains delivered by a stock in your portfolio would be an added bonus on top of the dividend.

Gathering a portfolio of FTSE 100 dividend shares and holding about £100,000 worth would, on average, generate £4,500 of passive income a year. If your portfolio is worth £200,000, then your annual dividend income will likely be about as much as the full State Pension.

FTSE 100 shares

If you’re new to investing, you could buy individual stocks that are suited to novices, or make it easy and buy into a FTSE 100 tracker. Another option could be to invest in low-cost exchange-traded funds (ETFs). For example, if you’re interested in dividend stocks, then the iShares UK Dividend UCITS ETF may be one to consider.

With that in mind, here are several large-cap shares I’m watching right now. I’d be willing to invest in them in 2020, especially if there’s any dip in their share prices. I’d like to buy these high-quality and dividend-paying businesses when they trade on low valuations and keep them in my portfolio for many years.

  • Aviva – dividend yield 7.4%, forward P/E 6.5, P/B 0.91
  • Barratt Developments – dividend yield 3.6%, forward P/E 10.8, P/B 1.67
  • BT – dividend yield 9.9%, forward P/E 6.3, P/B 1.46
  • Glencore – dividend yield 6.6%, forward P/E 11.2, P/B 0.95
  • HSBC Holdings – dividend yield 6.8%, forward P/E 10.7, P/B 0.82
  • Lloyds Banking Group – dividend yield 5.7%, forward P/E 7.7, P/B 0.79
  • Rio Tinto – dividend yield 6.1%, forward P/E 9.4, P/B 2.28
  • Royal Dutch Shell – dividend yield 7.3%, forward P/E 10.3, P/B 1.04

As always, don’t regard these as formal recommendations. Instead, view them as a starting point for more research. 

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.