I remember when I turned 40, the concept of retirement suddenly became all the more real. I had a pension, but I hadn’t planned much else and felt the need to secure a passive income stream.
Was I too late to start? Even though I still had 25 years to build my strategy, I was worried it might not be enough. However, that’s not necessarily the case. Here’s a plan that a 40-year-old investor may want to consider with the aim to secure a more comfortable retirement.
The target: £12,000 a year
Dividend stocks are usually the go-to option for income investors, paying out regular income on a quarterly, semi-annual, or annual basis.
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To secure £1k a month, the annual dividends would need to amount to £12k. Assuming an achievable average dividend yield of 6%, the required portfolio size would be £200,000.
To work out how much a 40-year-old would need to invest each month to build a £200,000 portfolio by age 65, we can use compound growth assumptions. Assuming a conservative average annual return of 8% (including capital growth and reinvested dividends), the investor would need to contribute around £210 a month.
It’s worth taking into account that with inflation, £1k in 25 years’ time may not be worth much. It would be wise to increase the monthly contributions each year to match inflation.
A portfolio strategy
First, investing via a Stocks and Shares ISA will help reduce tax obligations. It allows a UK resident to invest £20k worth of stocks a year with no tax charged on the capital gains.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
To secure the required growth and stability, a mix of stocks is best practice. Initially, it would be wise to include mostly growth stocks and defensive stocks. After retirement, this can be shifted towards high-yield dividend stocks.
It may even be worth considering a diversified fund like F&C Investment Trust (LSE: FCIT). It’s been going since 1868 and has enjoyed annualised growth of 7% a year for the past three decades. Although its yield’s low at only 1.5%, it’s grown consecutively for 50 years. This shows a consistent and reliable commitment to shareholder returns.
Extensive diversification
The trust’s portfolio is highly diversified, including both public and private companies spread across several sectors and regions. However, it’s top holdings lean strongly towards US tech stocks such as Nvidia, Microsoft, Apple, Amazon and Meta. This puts it at risk from a downturn in this area — as shown by an 8.3% decline this past month due to US trade tensions.
Global diversification also adds a risk of currency devaluations, which can impact overall returns.
However, only 58.9% of the portfolio is based in North America, with 14.1% in Asia and 9.3% in Europe. Sector-wise, it’s 22.6% focused on Technology, 14% in Financial Services and 10.9% in Consumer Cyclical. The rest is spread over Industrials, Healthcare, Energy and other sectors.
Overall, F&C’s both a stock worth considering for an ISA and a good example of how to diversify a portfolio for stable growth.
