Targeting a second income in retirement isn’t just a good idea. In my view, it’s absolutely critical. Given the UK’s rising debt and ageing population, relying solely on the State Pension might be a recipe for disaster.
For this reason, I’m building a nest egg with a diverse mix of global shares, trusts, and funds with ISAs and SIPPs. I’m confident the growth shares I own will help me raise the value of my portfolio over time. Meanwhile, the dividend shares I’m holding could give me enormous passive income I can reinvest, also helping me to grow my wealth.
The question is, how large does your Stocks and Shares ISA need to be to give you a comfortable retirement?
First step
The first thing to do is work out how much you need to live comfortably. And this involves calculating the size of the State Pension. For someone who’s made full National Insurance contributions, that figure today is roughly £12,548.
Next, we need to think about what the average retiree needs for a comfortable lifestyle. According to workplace pensions body Pensions UK, this stands at £43,900 for a single-person household.
That leaves a shortfall of £31,352 to be made up with an additional income stream. The exact figure will differ from person to person — not all retirees have the same goals or broader financial circumstances. Yet that gives us a good starting point.
Now let’s work it out
With this worked out, the next question we need to ask is: how much does your ISA need to be for that £31,000+ annual income? If I used my nest egg to invest in 7%-yielding dividend shares, I’d need £447,900 by the time I reach retirement.
That’s a lot of cash at first glance. But over a period of two-three decades until retirement? In my view, it’s a very achievable target.
As I say, I personally like to invest in a range of both growth and dividend shares, split roughly 50/50 in my portfolio. With this, I’m confident of achieving a 9% average annual return over the long term, made up of:
- 5% in capital gains, driven by periods of economic growth when stock markets typically take off.
- 4% in dividend income, providing a steady stream of cash even during weaker market conditions.
A top FTSE 100 share
Many of the stocks I own have provided even better returns, making up for some underperformers in my portfolio. Take FTSE 100 stock HSBC (LSE:HSBA), which has given me the best of both worlds.
During the last five years alone, this blue-chip bank’s risen a whopping 193% in value as profits have surged, helping me to grow my portfolio. With an average 6% dividend yield over the period, too, it’s provided me a healthy stream of passive income.
Can it keep delivering, though? I think it can, though I’m mindful of the threat challenger banks pose in Asian markets. HSBC has considerable brand power and financial clout to capitalise on this fast-growing continent. And it’s putting these to good use, building rapidly in areas like wealth management and making acquisitions like Hong Kong’s Hang Seng bank (which it completed in January).
As part of a diversified portfolio, I think HSBC shares can help me build a significant second income for retirement.
