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Retirement creeps up the same way Hemingway said bankruptcy approached: gradually, then suddenly. That can mean that many people do not think about how they will earn retirement income until far later than they should.
The good news is that it is ‘better late than never’ when it comes to financial planning for retirement.
Here is how someone who is 50 now could aim to build a £43,000 yearly retirement income by the time they are 67.
Getting serious about planning, finally
The first part of the plan is to put £20k a year into dividend shares.
That is a lot, I realise. But with the clock ticking until retirement, taking big steps can be far more financially impactful than starting on a small scale.
£20k is also within the standard annual contribution allowance for a Stocks and Shares ISA.
When it comes to retirement planning, another option to consider for its potential tax advantages could be a Self-Invested Personal Pension (SIPP).
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.
Growing value over time
If a 50-year-old invests £20k a year for 17 years and compounds it at 7% annually, at the end of that period their portfolio will be worth nearly £617k.
At a 7% dividend yeild, that ought to generate £43k per year of retirement income in the form of dividends, with no need to touch the capital.
That compounding can come from share price growth as well as dividends. But neither is guaranteed. Indeed, share prices can fall as well as rise.
Still, with a well-selected portfolio of blue-chip shares, I think a 7% target is eminently realistic in today’s market.
Nobody knows what the next 17 years will bring, of course, but over the long term I also see a 7% target as realistic.
On the hunt for bargain blue chips!
One share I think investors should consider is British American Tobacco (LSE: BATS).
The main appeal I see is the 6.1% dividend yield. British American has grown its dividend per share annually for decades and aims to maintain that track record.
Lately its share price performance has been strong too. It is up by a third so far in 2025 and 61% over five years.
But over the long term, the cloud hanging over both dividend prospects and the share price is the risk to profits posed by declining cigarette smoking rates in many markets.
Still, while cigarettes are declining in popularity, British American still sells hundreds of billions a year. Its premium brands like Dunhill give it pricing power.
It has also been developing its non-cigarette business in areas such as vaping.
It remains to be seen how profitable that business will be in the long term. But British American has been battling falling cigarette use for many years already and remains a huge cash generator, funding its generous dividend.
