It’s well known that the State Pension is not a lot of money. The payout of £164.35 per week equates to an annual income of just £8,546, which for a single adult, is generally not enough to live a comfortable retirement.
Yet just because the State Pension is low doesn’t necessarily mean that you have to struggle through retirement, counting your pennies. Plan ahead and build up some extra income and you could live a comfortable lifestyle in your later years.
With that in mind, today I’ll explain how you could generate an extra £10,000 per year in retirement using a simple investment strategy.
Dividend income
One easy way to generate extra income in retirement is to invest in dividend stocks. These are stocks that pay their shareholders regular cash payments out of their profits.
Here in the UK, it’s generally not hard to put together a portfolio of dividend stocks that yields around 5%. That means for every £1,000 invested, you’d receive around £50 in cash payments every year.
To generate income of £10,000 from dividends per year in retirement assuming a yield of 5%, you’d need a portfolio worth around £200,000 (£200,000 x 0.05 = £10,000) by the time you retire. Could you achieve this?
Easier than you think
While £200,000 may sound like a lot of money, building up this kind of sum of money over time could be easier than you think.
For example, if you started saving at 40, and put your money into a diversified portfolio of stocks or funds designed to achieve an annual return of 8% until you turned 68 (in a tax-free savings vehicle such as the Stocks & Shares ISA), you’d only have to save around £2,100 per year to generate a lump sum of £200,000. That equates to a little over £40 per week.
Even if you started putting money away at 50, you’d only have to save a little over £90 per week to build up a £200,000 portfolio by 68, assuming an annual return of 8%, according to my calculations.
£10,000 in dividends per year
Once you built up a lump sum of £200,000, this money could then be reinvested in a diversified portfolio of dividend stocks with a yield of around 5%, in order to generate income of around £10,000 per year. If the stocks were held in a Stocks & Shares ISA, this income would be tax-free.
Ultimately, having an extra £10,000 income per year would most likely lead to a much better quality of life in retirement, as your total income would be more than double the State Pension payout. With total income of nearly £19,000 you could probably afford things such as regular holidays abroad, meals out with friends, and presents for grandchildren.
In summary, if you’re worried that the State Pension is a low amount of money, it could be a good idea to plan ahead and focus on building up some extra income in retirement. The sooner you start saving, the better. Even a small contribution per week could make a big difference to your lifestyle in retirement.