If you’re approaching retirement and have concerns that you’ll outlive your savings, then you might be right.
A recent study by the World Economic Forum found that British pensioners will on average outlive their pension savings by about 10 years.
Investing in (and for) Our Future revealed that men retiring in the UK were expected to run out of money 10.3 years before they died. The outlook is worse for female pensioners, who can expect to outlive their pension pots by 12.6 years.
Despite the fact that people in the world’s developed economies are having more time to enjoy their retirement years, they are facing a serious and significant pension savings gap.
So, how can your finances be better prepared for the future?
Consider reinvesting dividends
For the vast majority of people, relying on a State Pension for retirement income isn’t a viable option. After all, the full amount that Britons can expect from the government is less than £9,000 a year and not everyone qualifies for this amount.
One way you can improve your financial outlook for the future, which several people approaching retirement age have chosen, is to buy top-quality dividend stocks and use this income to acquire more shares.
Reinvesting dividends kickstarts a compound process, which means that over time your initial investments could grow into significant savings.
For example, the FTSE 100 index currently has a generous dividend yield of 4.5%, making it one of the highest-yielding markets in the world. Any capital gains that you achieve with a stock in your portfolio would be an added bonus on top of the dividend.
So, say you have a FTSE 100 portfolio of shares worth around £100,000. This would generate £4,500 of passive income on average per year. If your portfolio is worth £200,000, your annual dividend income would be as much as the full State Pension.
What you need to know about FTSE 100 shares
Don’t worry if you’re new to investing – you could buy individual stocks suited to beginners or buy into a FTSE 100 tracker. Alternatively, consider investing in low-cost exchange-traded funds (ETFs).
There are a number of large-cap shares worth investing in this year, especially if there’s a dip in prices. Best practice is to buy these high-quality and dividend paying businesses when they trade low valuations and keep them in your portfolio for many years to come:
- Aviva – dividend yield 7.4%, forward P/E 6.5, P/B 0.91
- Barratt Developments – dividend yield 3.6%, forward P/E 10.8, P/B 1.67
- BT – dividend yield 9.9%, forward P/E 6.3, P/B 1.46
- Glencore – dividend yield 6.6%, forward P/E 11.2, P/B 0.95
- HSBC Holdings – dividend yield 6.8%, forward P/E 10.7, P/B 0.82
- Lloyds Banking Group – dividend yield 5.7%, forward P/E 7.7, P/B 0.79
- Rio Tinto – dividend yield 6.1%, forward P/E 9.4, P/B 2.28
- Royal Dutch Shell – dividend yield 7.3%, forward P/E 10.3, P/B 1.04
Please be aware that these are not formal recommendations; more of a starting point for further research into investing.