The Motley Fool

How I plan to create a passive income for retirement

Image source: Getty Images

Even though the government is keen to keep increasing the State Pension (it will rise 3.9% from 6 April), you’d still be better off if you could create an independent passive income for retirement. In my view, the State Pension won’t provide a comfortable retirement, putting the onus on an investor to have their own additional income when they stop working. 

Long-term focus

So where do you start? Unless you’re approaching retirement in the next few years, having a long-term view is going to be a key consideration.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

One of the many advantages of adopting a long-term mindset is it allows you to see beyond what are hopefully short-term problems such as the coronavirus. In 10 years’ time, will the coronavirus still be hitting company profits? Almost certainly not. And if it is, there’ll be bigger problems than the stock market to worry about.

Another advantage of a long-term view is it allows you to invest when stock markets dip – as is happening now – without panicking about where they’ll be in one, three or six months’ time. Instead, you can focus on where the stock market will be in five or more years. This perspective makes it easier to make rational decisions.

Careful diversification

There’s a balance to be struck when it comes to diversifying an investment portfolio. On the one hand, diversification reduces risk. If you don’t have a lot of experience or understanding of the stock market, it’s certainly the safer option. But many top investors warn against over-diversification. Warren Buffett is a classic example. He argues for those who know what they’re doing, being overly diversified limits gains and decreases your knowledge of specific stocks and sectors. 

Fund managers such as Nick Train, who runs the Lindsell Train investment funds, likewise tends to invest in fewer shares than most other professional fund managers. His returns are often much better.

This is because having a concentrated portfolio allows each company to contribute more to the performance of the portfolio, rather than acting like an index tracker. It has the added benefit that trading costs are likely to be lower as you buy and sell fewer shares. It doesn’t mean you should just buy one or two shares, but you don’t need 40 different shares in your portfolio either!

Focus on dividends and reinvesting

The third aspect worth focusing on is the wealth-enhancing power of dividends. By investing in dividend-paying companies, you as an investor receive an income from profits. Over time, this income can be used to buy more shares and this reinvesting becomes a virtuous circle. 

How so? You receive more dividends, you buy more shares and those additional shares provide more income. Year-on-year you benefit from what’s known as compounding. This helps a shares portfolio grow fast.

These are three steps in my plan to save and invest my way to a richer more fulfilling retirement. Sometimes the best plans aren’t complicated. The tricky part is having the patience and perseverance to make it happen. If you can make it happen though, and live off a passive income in retirement, you’ll realise it’s definitely worth it.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Andy Ross owns no share mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.