For many retirees, the State Pension alone is unlikely to provide the lifestyle they want. That means building additional sources of income is essential.
So how much would a Stocks and Shares ISA need to be worth to bridge the gap between the State Pension and a more comfortable retirement income?
Defining a comfortable retirement
There’s no single definition of a comfortable retirement. However, estimates from retirement industry research suggest a single person may need around £43,000 a year to enjoy a comfortable lifestyle.
After deducting the full State Pension, that leaves an income gap of roughly £31,000 a year.
Assuming a Stocks and Shares ISA portfolio could generate a 7% yield, here’s how much capital would be required to bridge different retirement income gaps.
| Target retirement income | Income gap after State Pension | ISA required at 7% yield |
| £30,000 | £17,453 | £250,000 |
| £35,000 | £22,453 | £321,000 |
| £43,000 | £30,453 | £435,000 |
| £50,000 | £37,453 | £535,000 |
Of course, achieving that level of income requires careful stock selection. For me, two interesting examples are HSBC (LSE: HSBA) and Legal & General (LSE: LGEN), which offer very different approaches to generating shareholder returns.
Looking beyond today’s yield
At first glance, HSBC might seem an odd choice for income investors targeting a portfolio yield of 7%. The shares currently yield a little over 4%, well below that level.
However, focusing only on today’s income can be misleading. Over the past five years, HSBC shares have risen more than 200% while continuing to distribute billions of dollars to shareholders through dividends and buybacks.
What matters is that the bank continues to generate substantial surplus capital. Management remains committed to paying out 50% of earnings as dividends and is targeting a return on tangible equity of at least 17% through 2028.
The main risk is that future returns depend increasingly on earnings growth rather than special distributions. A weaker global economy, rising loan losses, or slower growth across Asia could all weigh on profitability.
A different approach
At the other end of the spectrum is Legal & General. Unlike HSBC, the shares already offer an income yield of 8%.
That means investors don’t need to rely on years of dividend growth to generate meaningful income. Instead, a large proportion of the return arrives upfront through cash distributions.
The key question is whether that income is sustainable. Encouragingly, management recently increased its dividend growth target and the company continues to benefit from strong demand for pension risk transfer transactions, where companies transfer pension liabilities to insurers.
The business also generates substantial cash from its asset management and retirement operations, helping support future shareholder payouts.
Of course, no dividend is guaranteed. A weaker economic backdrop or disruption in financial markets could affect profitability and cash generation. However, for investors seeking higher levels of income today, the insurer demonstrates that there are still attractive yields available in the FTSE 100.
Bottom line
HSBC and Legal & General highlight two different approaches to building passive income. One offers a lower starting yield backed by growing shareholder returns. The other delivers a much higher income today. For investors trying to bridge the gap between the State Pension and a comfortable retirement income, combining both approaches could be worth considering.
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Andrew Mackie owns shares in HSBC and Legal & General.
