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I think investing £250 a month in dividend stocks could help me earn a second income of £203.85 a week, or £10,600 a year. That is currently the amount of the full UK state pension.
I’m due to reach state pension age in 2056. But I’m not sure what will happen between now and then, so I think it’s worth setting up my own retirement fund, in case there are any significant changes.
The UK State Pension
Relying on the state pension to fund my retirement seems risky to me. Simply put, I doubt the UK economy is in a good enough position to meet the government’s pension commitments.
One of the reasons for this is the aging of the population. As people continue to live longer, the number of retirees eligible for public support increases, making pension obligations more expensive.
Another is inflation. Pensions are currently protected against the rising cost of living, but the Bank of England’s 2% inflation target means the cost of this promise is virtually guaranteed to rise each year.
I fear this could mean an increase in the state pension age is on the cards. If this happens, you may not be eligible in 2056, so you would have to reconsider a plan to rely on the state for income 33 years from now.
In any case, it is out of my control. Neither the state of the economy nor government policy depends on me, so having the State Pension means putting my financial future in the hands of someone else.
Invest in the stock market
Therefore, I am looking to build my own infrastructure that can sustain me in retirement. My ambition is to build a portfolio of dividend stocks that I can use for income 33 years from now.
To start today, I would think about buying shares of Lloyds Banking Group, kraft heinzand Primary health properties. None of these are completely risk-free, but they all seem like good value to me at the moment.
More importantly, each has a dividend yield of over 5%. If I can invest £250 a month for the next 33 years and earn a 5% return, I will have built a portfolio that will generate £10,900 in passive income by 2056.
The average performance of the FTSE 100 In the last 20 years it has been just under 7%. So even if returns are lower in the coming decades – as I suspect they will be – a 5% return seems realistic to me.
Additionally, investing through a stocks and shares ISA would mean I won’t have to pay tax on my profits or income. And I will be able to withdraw them in 2056 even if the retirement age has increased.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Taking control
Investing £250 a month in dividend stocks could provide me with a significant passive income in retirement. This would help me limit the risk of depending on the State in 33 years.
If things work out and the State Pension infrastructure remains intact, that will be great too. I will have my dividends as a second income to enjoy.
