Do you need a million to retire comfortably?
For most, I think the answer to that question is "no". I'd go as far as to say that a mere £500,000 would be sufficient to generate an income capable of providing a happy retirement.
By the time most people think about taking retirement they've paid off their mortgage, so a big expense from earlier years is absent from the monthly budget. Mortgage-free home ownership gives you the financial freedom to live a rewarding life with a lower income and around £500,000 may be enough capital to generate such an income.
This is what £500,000 can yield at different annual rates of return:
Rate of return
I admit that things could still be a little tight if you don't own your own home by the time you retire and perhaps have to keep paying rent. However, if you are in a relationship both you and your partner have the opportunity to build retirement pots, so potentially the above returns could be doubled.
A return of 5% yields an income close to Britain's national average salary, which stands around £28,000. My guess is that, for most people, an income like that in retirement would be enough enjoy life to the fullest. On top of that, you'd still have the original £500,000 capital in the pot plus the value of the property you own. I think many people could feel secure on that.
How it can be done
You have a decent shot at achieving a return of 5% every year if you invest your money in shares paying a reliable and growing dividend. If you invest in firms with a strong record of growing their incoming cash flow and paying dividends that rise a bit every year the dividend yield of your overall portfolio should grow towards 5% and beyond.
By selecting firms with defensive, growing, cash-generating operations your dividend income is likely to grow a little each year, which should help your personal finances to keep up with inflation through your retirement. In addition, as firms raise their dividends to keep pace with the underlying growth of their businesses their share prices tend to rise too, which should help your invested capital keep up with inflation.
How to accumulate the £500,000 you need
The key to this retirement funding strategy is to ensure that you invest in good quality firms with stable cash-generating qualities. You don't need to take great risks on the stock market to succeed, just invest and hold on to decent, reliable dividend paying firms.
You can build your retirement pot in the same manner. Invest in great dividend-paying firms, but instead of drawing the dividend income to live on, reinvest the dividends back into the firms you are holding so that your returns compound.
Do that and £500, 000 -- and a happy retirement -- could be closer than you imagine.
Shares with underlying businesses that are growing with steadily rising cash flows and dividends make it possible for you to compound your returns and build your wealth. That's why such a strategy is step five in the Motley Fool research report called Ten Steps To making A Million In The Market.
I urge you to find out about the other nine steps that could help propel you to a life-changing sum of money. This research is free and you can download it right now. Why delay? Good luck on your journey. Click here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.