To retire comfortably, you need a reliable source of passive income that lasts for decades.
This challenge is underscored by the ever-rising pension age, reflecting the strain on the State pension system.
The age at which we can retire is set to rise to 67 between May 2026 and March 2028, and expectations are it will increase to 68 from 2044. Research released this month by the International Longevity Centre suggest even this may not suffice. The think tank proposed a rise to 71 instead.
The crux of the issue with the State pension system is that contributions today fund current retirees, rather than investing in burgeoning businesses or technologies. This model is increasingly unsustainable due to demographic shifts leading to a larger retired population supported by a smaller working-age base.
Go my own way
So, what’s the alternative? Personal investment. By proactively managing my finances, I can secure my retirement independently of the State pension age.
I’d opt for stocks over a fixed savings account with a 5% return. That’s because the long-term average stock market return is around 10% annually.
Investing my £20,000 Stocks and Shares ISA allowance at this rate, let’s examine the potential growth over 35 years compared to a 5% return:
| Growth rate | Start (£) | 35 years (£) |
| 5% | 20,000 | £114,674 |
| 10% | 20,000 | £652,773 |
At a 10% growth rate, my initial £20,000 investment could blossom to £652,773 in 35 years, a stark contrast to the £114,674 at a 5% growth rate. Even though 10% is only twice as much as 5%, the compounding effect leads to me banking nearly six times as much by the end of the 35-year period.
Decisions, decisions
How would I go about investing in stocks? First, I’d open a Stocks and Shares ISA and max out the £20,000 limit.
I’d fill the account with a broad selection of international, high-quality, dividend-paying companies. I’d look through the FTSE All-World High Dividend Yield Index for ideas. This index features a range of companies across various sectors and countries, offering a blend of growth potential and dividend income. Notable constituents include technology giant Broadcom, banking leader JPMorgan Chase & Co, and energy titan Exxon Mobil Corporation, among others. These companies could offer robust returns while diversifying my investment risk.
By the end of the 35-year period, I’d use the 4% withdrawal rule. This would, in theory, allow me to take out £22,974 a year without threatening the principal.
Of course, while that sounds like a decent chunk of change to live off today, I dread to think how much a loaf of bread, a pint of milk, or a week’s holiday to Spain might cost by the year 2059.
I could bolster my yearly withdrawal by drawing down some of the principal too if necessary while I waited for the State pension to finally come through.
