It takes time and hard work to generate a decent level of passive income for retirement. I can’t expect to sit back and let the income roll in when I stop working. I need to start early and stick with it.
Probably one of the best ways to generate a passive income in retirement is to invest in the shares of UK companies listed on the FTSE 100 and FTSE 250. They pay some of the most generous dividends in the world.
Today, the FTSE 100 yields 3.53%, with all capital growth on top. Many companies listed on the exchange pay much higher dividend income. Insurer Phoenix Group Holdings currently yields 8.13% a year, while fund manager abrdn yields 9.6% and mining giant Antofagasta pays 10.08%. There are plenty more top dividend stocks to choose from.
I’m getting active about building passive income
While the FTSE 250 contains smaller, faster-growing companies that are focused on generating growth and income, the index still yields 2.71% a year right now.
Investing £3 a day doesn’t sound much to build a retirement on. But money is tight for almost everybody right now and investing something is always better than doing nothing. Any money I can save today will reap rewards later in life.
Investing £3 a day works out at £90 a month or £1,095 a year. If I invested that in a self-invested personal pension (SIPP) and claimed 20% tax relief on my contributions, the government would add £274. That would lift my total pension contribution to £1,369 a year.
Were I a 40% taxpayer, the real cost of that £1,369 contribution would fall to £821, after claiming back the difference between basic and higher-rate tax relief. How much pension £1,369 would give me depends on how many years I invest, and how fast my portfolio grows.
If I invested £1,369 a year and it grew at an average rate of 7% a year after charges (which, of course, isn’t guaranteed), I’d have £293,432 after 40 years. That’s a tidy sum although its real value will have been eroded by inflation. That’s why I’d aim to increase my £3 a day contribution over time.
I’d buy FTSE 100 shares for their yields
Let’s say I increased my contribution by 5% every year. After 40 years I would have a more impressive total of £581,132. Of this, I would have invested £165,375, with compound interest making up the remaining £415,758. No wonder physics genius Einstein called compound interest the “eighth wonder of the world“.
The earlier I start investing my £3 a day, the better. Delaying by just 10 years would cost me dear. My pension would total just £240,987 instead of £581,132, if I invested the same sum over 30 years instead of 40 years. That 10-year delay would have more than halved my retirement pot.
The first £1 invested is always the most valuable, because it has longer to compound and grow. That applies if investing £3 a day, £5, £10 or any sum.
