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Could you imagine being able to live on £11,973 a year? I couldn’t. Yet this is the situation for those who count the State Pension as their sole source of income. In my opinion, taking steps to achieve an extra passive income in retirement is essential.
My plan is not just to survive in retirement, but to thrive and do the things I couldn’t do working a full-time job. So I use tax-free Stocks and Shares ISAs and my Self-Invested Personal Pensions (SIPPs) to target a second income that could fund a comfortable retirement.
I think a £4,000 monthly retirement income is a nice chunk of cash to target for when I finally retire. But how much would an investor like me need in their ISA and/or SIPP to reach this goal?
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Achieving a £4k income
There are a number of strategies individuals can use to target income later on. Two of the most popular are withdrawing money from a retirement fund, and investing one’s nest egg in dividend shares.
I like the idea of holding passive income stocks myself. While dividends aren’t guaranteed, I don’t have to worry about my retirement pot going down to zero after a couple of decades. I can also reduce (if not totally eliminate) any passive income volatility by holding a diversified portfolio of dozens of companies.
This can be increased to hundreds if I choose to buy investment trusts and/or exchange-traded funds (ETFs) that also hold dividend stocks.
To make a £4k passive income with this strategy, I’d need a combined £686,000 across my ISAs and SIPPs. That’s based on investing my money in 7%-yielding stocks.
A great FTSE 100 stock
Clearly that’s not small change. But it’s a realistic target with time and a commitment to regular investing. A £500 monthly investment in shares, trusts and funds providing a 9% average annual return would generate this in just over 27 years, although such a return can’t be guaranteed.
Aviva (LSE:AV.) is a FTSE 100 share I’m optimistic will help me achieve the retirement portfolio I’m targeting. Since 2015, it’s delivered an average annual return (share price gains plus dividends) of just over 7%.
That’s lower than the return I’d ideally be seeking. But I think that strategic measures made during the late 2010s, like taking tough decisions to mend the balance sheet, will pay off and deliver better returns in the future.
Aviva operates in an extremely competitive marketplace, which poses a significant threat. But it still has enormous opportunities for growth, as demographic changes supercharge financial services demand. The company also has robust brand power that it can leverage to achieve rapid sales growth, and plenty of cash on the balance sheet for investments.
As of June, its Solvency II shareholder capital surplus was a substantial £8.1bn.
Building a reliable passive income for later on typically takes time, patience and effort. Yet experience shows that shares like this held in an ISA or SIPP can open the door to a easier life in retirement.
