I’m taking steps to generate a healthy passive income for when I eventually retire. It involves creating a balanced portfolio, dominated by top-quality FTSE 100 (and to a lesser extent FTSE 250) stocks.
Like all of us, I plan to enjoy my older years to the fullest after a lifetime of work. But I’m wary of how I’ll be able to do this with state assistance. By taking steps today, I hope to become financially independent in retirement regardless of what happens with the State Pension.
Latest research on Monday underlines the wisdom of such a strategy. Give me a few minutes to talk you through its key points, and to tell you what I plan to do next.
Waiting to 71?
The age at which Brits can claim the State Pension is scheduled to rise steadily in the coming decades. It will increase to 67 between 2026 and 2028. And it is set to rise to 68 from 2044.
Research from the International Longevity Centre suggests that current plans may be wishful thinking, however, as the UK grapples with a growing elderly population and fewer people in the workforce.
The organisation says that the State Pension age “would need to be 70 or 71 compared with 66 now to maintain the status quo of the constant number of workers per state pensioner“.
FTSE 100 returns
I don’t know about you. But I have no plans to carry on working until I’m in my 70s to keep the lights on. I’m reclaiming control by making a regular investment in UK shares in my Stocks & Shares ISA.
If things go to plan, I won’t have to fret over future policy concerning the State Pension. Past performance is not a reliable guide to what will happen. But if the long-term return on FTSE 100 stocks stays the same, I stand to make a very decent income for retirement.
The UK’s leading index of blue-chip shares has delivered an average annual return of 7.5% since its inception in 1984. If this remains the same I could potentially make a passive income of £26,950 every year. And that’s excluding any benefit I would receive from the State Pension.
A £26,950 passive income
This is thanks to the mathematical miracle of compounding. This involves the reinvestment of dividends to allow me to earn money on those on top of any investments I make from my wage packet.
Let me show you how this would work in reality. If I invested £500 each month I would — after 30 years, and assuming that 7.5% average on FTSE shares remains the same — have built a magnificent nest egg of £673,723.
I could then turn this into a decent yearly passive income of just under £26,950. That’s assuming I draw down 4% of my pension pot every year.
Investing in shares can be a wild ride at times. However, over the long term it can be a great way to build cash and achieve financial freedom in retirement. It’s why I plan to continue building my UK stocks portfolio instead of, say, putting my money in a low-yielding cash account.