I’m hoping to build a substantial passive income in retirement with the help of dividend shares. The reason? I simply don’t think that relying on the State Pension to fund my lifestyle is going to cut it.
According to Pensions UK, single Brits today need £45,400 a year to live a comfortable retirement. And that’s AFTER tax. The figure sits at £54,720 before HMRC have taken a slice.
With the full State Pension currently at £12,548, that leaves a £42,172 shortfall account for pensioners who pay tax. That’s a huge gap to plug, I’m sure you’d agree. But it’s not impossible.
In fact, targeting a comfortable retirement is within reach for most of us. It simply means thinking carefully about the best way to grow your wealth over time.
The ISA boost
One tactic I’ve chosen is to invest in a Stock and Shares ISA. This way I get instant protection from capital gains and dividend taxes, giving me more money to accelerate the compounding process and portfolio growth.
The tax advantages don’t end there either. Any withdrawals I make are also free of tax. This is critical as, rather than having to think about making up that £42,172 income shortfall, I only to need aim for the £32,852 gap between the full State Pension, and the £45,400 Pensions UK says is needed for a comfortable retirement.
In other words, using an ISA eases the task of building my nest egg by:
- Lowering the amount I need to contribute.
- Shortening the time needed to build up my portfolio.
- Providing a greater margin for error if investment returns disappoint.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Investing £300 a month
Investing in the stock market is riskier than putting your money in a Cash ISA. The value of one’s capital can go up and down in a Stocks and Shares ISA. But then the chances of generating enough cash to retire comfortably are significantly higher.
Let’s say you invest £300 a month in stocks. Based on the long-term annual average of 9%, that would build a portfolio of £471,239 in less than 29 years. This could then be invested in 7% dividend shares to fund your £32,852 retirement income shortfall.
Saving in a 4% interest-paying Cash ISA, on the other hand, would only yield a £189,943 retirement fund over the same timeframe. This in turn creates its own risks.
A top investing opportunity?
Picking individual shares can help us achieve (and often beat) that 9% return in an ISA. But exchange-traded funds like the HSBC S&P 500 ETF (LSE:HSPX) can also help us achieve a comfortable retirement with little effort.
Funds like this provide the added benefit of instant diversification. In this case, investors get exposure to 500 different US shares straight away. The result? Exposure to brilliant growth opportunities (like tech shares), big dividend payers, and a smoother and less volatile return over time.
Over 10 years, this ETF’s delivered an average annual return of 15%. Future returns could disappoint if investors start rotating out of US shares. But on balance I’m confident it can keep helping investors make a robust retirement income.
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Royston Wild owns shares in HSBC S&P 500 ETF.
