Even though I spend a lot of time trying to plan out my personal finances, things don’t always go to plan. I’m hoping to get to 50 with a plump savings account that I can build on until I reach retirement age in my mid-60s. However, if some unplanned expenses crop up along the way and I reach 50 without savings, I’m not going to panic. Rather, I’d look to build up some passive income to help me out.
Using my income to set aside funds
My current state pension age is 67. If I reach 50 without savings, I’ve got a time horizon of 17 years for me to build a decent pot. In theory, at this stage in my life I should still be earning, but my expenses should start to decrease. For example, I should have less to pay on my mortgage.
To begin with, I need to calculate how much of my income I can put aside each month. I’m going to make the assumption of £250 a time, with some frugal spending. So I’ll take this amount and invest it in dividend stocks.
My savings will start to build in two ways. I’ll own stocks that have a market value at any point in time. On top of this, I’ll start to receive income from the dividends that get paid out each year. If I build up a portfolio of different shares, I’d expect to receive some form of payment on a monthly basis.
Picking the right type of dividend stocks
Given that my time horizon is 17 years, I’m not that interested in picking high-dividend-yield stocks today. These are often flash-in-the-pan stocks that might not be sustainable as far as paying out income in a decade or beyond is concerned.
Rather, I’d focus on lower-yielding options, but with a strong history of paying out. I’d also be happy to take on some companies that might not pay a generous dividend at the moment. But if they reach maturity in coming years, higher income payments would be a key way to keep investors interested.
For example, Virgin Money (2.68%) and Greggs (3.06%) both have dividend yields below the FTSE 250 average. Yet I’d want to buy both stocks. Over time I think they could grow their dividend-per-share payouts.
Potential passive income figures
All of my figures are based on the fact that the stocks I hold will continue to pay me income for many years. This might not hold true though, and I might need to buy and sell over this period to manage this risk.
If I started today with £250 a month, I could grow my pot to a very respectable size. If I assume an average dividend yield of 5%, at the end of 17 years I’d have a portfolio worth £80,715. The growth would be fuelled by my reinvestment of the dividend payments during this period.
From then on, I could enjoy the 5% dividend (£4,035 a year) that would more than cover my golf green fees!