How will the rise in UK living costs affect your retirement years?
With ever-increasing costs as well as longer life expectancies and the growing number of years the average Briton will spend in retirement, each of us might actually need about a million pounds to see us through our golden years comfortably.
Today, I’m going to share with you the three catalysts to achieving that million – dividend shares, compound interest and time.
The power of compounding
The thought of saving a million pounds may sound daunting at first. For example, if we plan to retire in 30 years with a million, simple arithmetics would say that we’d need to save at least £33,333 a year, or £2,777 a month.
Most of us might look at that number and feel overwhelmed. Thankfully, compound interest, which has a snowball effect on personal savings, may help us get to our destination more easily.
By investing the money we save, we can make use of the power of compounding to help us grow our money.
In the UK, interest rates in bank savings accounts are low. But there are many shares and REITS listed on the FTSE 100 or FTSE 250, averaging a sustainable annual dividend yield of about 5%. Any capital gains delivered by the stock would be an added bonus on top of the dividend.
I believe that making the right investment decisions in stock markets is not necessarily about constantly picking winning shares and funds, but rather having a long-term strategy and patience.
Thus, if we invest in such dividend-paying shares or REITs each month, the amount we’d need to save to achieve a million pounds decreases dramatically.
To reach our goal in 30 years, we need to invest about £1,250 each month (or £15,000) into a 5% yielding investment and continually reinvest the dividends.
And we would have slightly over £1 million at the end of 30 years.
The actual amount would depend on how many times we compound during the year. But, the message stays the same: the sooner we start to invest, the more money we are likely to have for retirement.
Several shares to consider
The FTSE 100 consists of the 100 UK-listed stocks with the biggest market capitalisations. Many FTSE 100 shares have generous dividend yields that pay between 4%-6% annually on average.
To me, when companies pay steady dividends, it usually shows that they put shareholders first when it comes to profits, not just paying management. Although there will be exceptions, they are also generally established and cash-rich companies where management is able to take steps to ride out volatile or tough market conditions.
Income investors also know that they can compound their returns through reinvesting dividends from high-yielding shares. They treat their dividends with respect and reinvest them so that they can enter the exclusive millionaire club.
In other words, a sizeable amount of wealth can realistically be accumulated by long-term ownership of profitable firms that generate ever-growing earnings and that also pay dividends.
Any suggestions from the FTSE 100? At present, tobacco firm Imperial Brands offers a yield of about 11.5%. Telecoms giant BT has a yield of 8%. WPP, the multinational advertising group, and Royal Dutch Shell, the oil major, each have a dividend yield of about 6%. At the lower end, pharmaceutical giant AstraZeneca, whose share price has been on the rise in 2019, pays 3% in dividend yield.