I’ve been targeting an extra income for retirement for years now, to be delivered with a diverse mix of dividend stocks. The perils of not doing so in my opinion are too great given uncertainties over the State Pension. And after events this week, the importance of taking action has risen several notches.
So what’s happened? And what can investors do to protect themselves from retirement poverty?
What’s happened?
I’ve long worried about the future of the State Pension as the UK’s elderly population rapidly grows and nation’s debt rises. This includes the threat that a future government could rip up the ‘triple lock’ mechanism.
As a reminder, the lock is designed to protect the value of the State Pension. It ensures that pensioner benefits rises by whichever of these three figures is highest:
- Average wage increases.
- Consumer price inflation (CPI).
- 2.5%.
At Labour’s conference on Wednesday (29 October), Prime Minister Andy Burnham finally grasped the nettle and announced changes to how future pensions might be calculated.
What did he say?
According to Burnham, Labour will axe the triple lock in April 2030. After that date, the State Pension “will continue to rise every year at least by prices or 2.5%,” he said.
Axing the link to earnings could potentially lead to lower State Pensions, meaning retirees have to find ways to make up the shortfall. Labour might be the only party to have announced changes so far, but economic realities mean whichever party wins the next General Election will have to make similarly tough choices.
Man with a plan
As I say, I’m not leaving my retirement income at the mercy of any decision by future governments. My plan is to be fully financially independent by investing chiefly in the stock market. I’ll treat any State Pension I receive as a handy bonus.
With an average long-term return of 9% a year, share investing could turn a regular investment into a large nest egg by the time I retire. Most of my leftover cash each month is invested in stocks, funds and trusts in my Stocks and Shares ISA and Self-Invested Personal Pension (SIPP).
The remainder is saved in my lower-yielding Cash ISA. Each of these products saves me from paying tax, giving me extra cash to boost the compounding process.
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.
Targeting a £44k+ income
If I can achieve an average annual return of 8% across all my share and cash holdings, I could turn a £500 monthly investment into £745,180 after 30 years. This would then generate a £44,711 yearly passive income if then invested in 6%-yielding dividend stocks.
My strategy is to hold a diverse range of stocks that reduces risk and provides a stable return. This can be done by buying individual shares, and/or by purchasing diversified funds or trusts that hold income-paying stocks. Take the iShares MSCI Target UK Real Estate ETF (LSE:UKRE) as one great pick retirees today can consider.
This fund holds shares in 25 British real estate investment trusts (REITs). It can fall in value when interest rates rise and that’s a major risk. But it can still deliver a large and reliable passive income from year to year, helped by its holdings of UK government bonds (gilts).
For 2026, the dividend yield here is an enormous 6.2%. Whether you’re drawing retirement income, or looking to build a portfolio to protect yourself from State Pension changes, I think it’s a top fund to think about.
What income stock do we like better than iShares III Public – iShares Msci Target Uk Real Estate Ucits ETF right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Royston Wild does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
