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What kind of income can those over 50 earn? The latest article from The Times revealed one answer: it depends on where you come from! Those over 50 in the UK have an average pension pot of £42,600, while the same group in the US has an average of £365,500!
Leaving aside the many differences between the two countries in terms of investment (and everything else…), the small number of the UK is strange. It seems like a small amount of money to get a big income, but it could end up being an income of £7,758. Here is the way.
Being optimistic
Another major difference between British and American investors is the appetite for risk. I don’t think it’s an understatement to say that most Brits hate the idea of losing money on property. This is reflected in the choices we make in our ISAs – around 40% have a Cash ISA (no risk of losing money) while only 16% have a Stocks and Shares ISA (high risk of losing money).
The truth is: all investors in the stock market lose money. The one stock I have is the owner Guinness and other types of drinks Diageo. The stock is down 40% in the last few years. I lost almost half of my money on it.
Am I being bothered? Yes Yes. A lot, actually. It’s really annoying. But I accept that it comes with the territory. And because my portfolio is so different from many other big businesses, I’ve actually grown at the same time.
What kind of business is good to invest in? One stock I have hope for right now Aviva (LSE: AV.). The insurance giant is up 21% over the past year, helped by a bumper year for FTSE 100 index.
Established FTSE 100 companies with great brand name recognition may be a good place to start for passive investors. Everyone knows the name Aviva – and you’ve probably seen millions of their adverts with Paul Whitehouse! Investing in a household name with a market capitalization of £20bn may ease some worries about losing money.
Real magic
Another factor in the company’s favor is that it has excellent moving profits. Current forecasts expect a yield of 6.24% over the next 12 months and higher in subsequent years. On a pot of £42,600, that would work out to an income of £2,658 a year – although it’s best to spread the investment across multiple stocks to be safe.
At the same time, any potential investors should still weigh the risks here. The risk of autonomous (self-driving) vehicles can add money to its auto insurance segment. If these self-driving cars are successful when they hit London this year, then the shares could fall.
The real magic, as any investor will tell you, is in compound interest. If we had 15 years to let the nest egg grow by saving and reinvesting, we would be looking at serious income. Using 9% returns, including all dividends and share price growth, £42,600 could turn into a pot of £155,169. A dividend yield of 5% from this income is £7,758 per annum. Not too shabby!
