Have you started to think about New Year resolutions yet? I say you could do a lot worse than making a long-term commitment to do something about your retirement planning.
If you can live comfortably on the State Pension of around £8,500 per year you’re in quite a minority, but good for you. Most people, however, will need to make extra provisions for their old age.
But for a lot of people, it’s just not happening. A year ago, the Department for Work and Pensions estimated that 38% of the UK’s working population were failing to save enough for a comfortable retirement. That’s around 12m people. Do you really want to be one of them?
Every little helps
I reckon every £100 per month you can stash away today could make your retirement just that little bit better. But, whether you use a SIPP or an ISA as your investment vehicle, where should the money go? A cash ISA is a surefire way to lose money at the moment, as the best rates I can find are around 1.5%. That doesn’t even match inflation. Anything that’s guaranteed to lose you money in real terms doesn’t deserve to be considered an investment.
For me, the best combination of potential returns compared to risk, is buying FTSE 100 shares.
Over the past five years, the UK’s top index has grown by approximately 0%, which is admittedly even worse than a cash ISA. But dividend yields have been averaging around 4%, and that easily beats inflation. In fact, as earnings and dividends have risen while share prices have stagnated, average yields have grown to around 4.5%.
Looking at the shorter term, the FTSE 100 has fallen by 14% over the past 12 months. My retirement shares are mostly FTSE 100 ones, but I’m not worried. Let me explain why.
Dividend strategy
I go mainly for high dividend yields, and the shares in my SIPP look set to earn me a return of 5% this year. That’s obviously nowhere near enough to cover a 14% share price fall, but that’s not the key point. That’s because what I’ve been doing is investing my dividend cash in more high-yield FTSE 100 shares.
As long as I’m confident that this year’s share price falls are caused by weak stock market sentiment and not any fundamental weakness in the companies I own, a market fall was exactly the right result for me in 2018. That’s because I’m ending the year with more shares (and more in potential dividends for 2019 and beyond) than had the Footsie risen.
It might sound counter-intuitive, but when you have your investment sights focused on the long-term and you’re in a net investment phase, short-term falls are very much to your advantage.
Just one
As a single example, if you buy Royal Dutch Shell shares now, you’ll get a 6.4% dividend yield (if dividend forecasts prove accurate, which they have done for a long time for Shell). Now, you might be worried about buying Shell when the oil price is falling again — but back in 2015 when the oil crisis was in full swing, you could have secured a dividend yield of 8.3%, and still be enjoying that today.
My favoured retirement investment strategy is to go for a diversified portfolio of high-yield FTSE 100 shares, and I’m convinced it’s the best approach there is.