Even without a pension pot at 50, I still think it’s feasible to generate sufficient income to have a decent retirement.
Assuming a full record of national insurance contributions, those currently of this age can look forward to receiving (when they are 67) a weekly state pension of just under £204.
However, for a relatively stress-free retirement, I’d be looking for income equal to 50% of average earnings. According to the Office of National Statistics, median gross pay is currently £640 a week.
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With entitlement to the full state pension, my weekly passive income target is therefore £436.
But time is running out. The key to successful investing is to start early. However, I’m going to assume that I only have 17 years to reach my goal.
Dividends galore
I intend for the majority of my income in retirement to come from dividends from reputable stocks, like the ones typically found in the FTSE 100.
Every quarter, AJ Bell publishes an estimate of dividend payments. The 10 highest-yielding shares in the Footsie currently average 8.1%.
Of course there’s no guarantee that the present level of dividends will be maintained. That’s why it’s important to consider the level of dividend cover (earnings divided by dividends) for each of these stocks.
A company that returns most of its profits to shareholders may not be able to sustain this for very long. For a business to grow it’s necessary to invest in new technology and product development. Cash is also required to repay any borrowings.
| Stock | Estimated yield (%) | Estimated dividend cover (times) |
| Aviva | 10.1 | 1.52 |
| Glencore | 9.1 | 1.90 |
| Vodafone | 8.9 | 0.92 |
| Legal and General | 8.7 | 1.60 |
| HSBC | 8.5 | 2.16 |
| British American Tobacco | 8.5 | 1.52 |
| Imperial Brands | 7.7 | 1.74 |
| Barclays | 6.8 | 3.78 |
| NatWest Group | 6.6 | 2.59 |
| Lloyds Banking Group | 5.8 | 2.81 |
| Average | 8.1 | 2.05 |
But for the purposes of this exercise, I’m going to assume that it’s possible to achieve an annual return of 8%.
I therefore need to have £283,400 in my retirement portfolio — by the time I reach my 67th birthday — to generate passive income of £436 a week, or £22,672 a year.
So how much do I need to invest each year to achieve this?
Growth
According to Credit Suisse, from 1973 to 2022, the UK stock market grew by an average of 5.6% each year. This assumes all dividends are reinvested, which has the effect of compounding returns.
The simplest way to try and emulate this performance is to invest in a tracker fund. This avoids having to pick winners and is an easy way of having a diversified portfolio.
Investing £9,855 at the start of each year would — assuming the stock market performs as it has historically — grow to £283,429 in 17 years. That’s not a bad return for a stake of £167,535.
However, that’s still a lot of money to find. But for most people — myself included — it’s not going to be possible to have a reasonable retirement income without making some sacrifices earlier in life.
Starting to invest at a younger age would reduce this figure significantly. Investing half this amount over 26 years would achieve the same end result.
In my view, it’s never too late to start saving for retirement. But if I didn’t have a pension plan in place by the time I was 50, I wouldn’t give up hope of having sufficient income in my old age to enjoy myself. However, it’s best not to delay much longer.
