The outlook for future generations of pensioners is looking increasingly bleak. It’s why I’m taking steps to protect myself by buying UK dividend stocks.
The age at which Britons can claim the State Pension is set to rise sharply in coming years. This is in response to the growing strain on public finances and the rapid growth of Britain’s older population.
Reports this week suggest that things are likely to get even tougher for pensioners too.
State Pension danger
It’s widely rumoured today that ministers are preparing to raise the State Pension age to 68 by the mid-2030s.
Under current rules, the threshold — which at the moment stands at 66 for men and women — is due to rise to 67 between 2026 and 2028, before increasing to 68 between 2044 and 2046.
New prime minister Liz Truss hasn’t scotched recent reports either. She told journalists on Tuesday that raising the pension age threshold is “a decision yet to be made.”
Market turmoil over the government’s programme of unfunded tax cuts has raised the prospect of belt-tightening that could hit the State Pension. Ratings agencies Moody’s and Fitch have both downgraded the UK’s credit outlook to ‘negative’ in recent days, increasing the pressure still further.
Why I buy dividend stocks
The age at which I’ll be able to claim the State Pension has long been a concern of mine. Whether or not the benefit will be sufficient to fund my retirement has also troubled me, given the rising cost of living and social care.
An explosion in pensioner poverty during the past 30 years underlines how weak the purchasing power of the state benefit has become.
But I’m not panicking. By investing in dividend stocks I have a chance to retire comfortably, regardless of what happens to the State Pension.
No savings? Don’t panic
I’ve been building a balanced portfolio of growth and dividend shares for many years. I’ve invested little and often so I can eventually enjoy a healthy passive income stream in retirement.
Share investing is proven to provide an average annual return of at least 8%. This means that investing fortunes isn’t required to build a decent nest egg to retire on. It also means that those who have little or no savings could still have time to take action.
Compound miracles
This is thanks to the miracle of compounding. This is a simple-yet-effective process which means I earn interest on my investments and on all previous interest.
Let’s say that a 40 year-old has £300 to invest in UK shares each month. If they can hit that 8% average annual return they would, by the current State Pension age of 68, have made a splendid £343,220 for retirement.
If they then adopted the tried-and-tested 4% withdrawal rule they’ll have an annual passive income of £13,728. That’s not bad, in my opinion. And especially when they’ll also have the State Pension to add to it.
By drawing down 4% a year, an investor can enjoy a healthy second income without depleting their savings pot. The money they don’t touch will still generate a healthy return that replensishes what’s withdrawn. It’s the plan I have to target a comfortable and stress-free retirement.