How I’m building more passive income to retire early

While I love working as a financial writer (over 20 years and counting), I’m not thinking about early retirement. However, after turning 55 this month, more options are now available. Even so, my husband and I feel like we just don’t have the passive income to call it a day.

Enjoy flexible retirement

Today, fewer Britons are opting to retire straight away at the ‘normal’ retirement age. However, some people continue to work while drawing on their pension. Others work part-time, mixing earned and unearned income. And some Britons never stop working before they die.

Recently turning 55 gave me the option of early access to the benefits of the employee’s pension. I have two ‘gold-plated’ final-salary/defined-benefit schemes from many years of working in the financial sector. In addition, I have created a modest pension pot with my own contributions.

That said, this amount is not enough to live until death. Also, I won’t be eligible for my state pension until 2035, when I turn 67. So what should I do?

I need more passive income

To retire comfortably and/or early, I need more passive income. There are many ways I can generate this extra income. For example, I can deposit money in a safe savings account and spend the interest. But I don’t know anyone who got rich by not taking risks.

Alternatively, I can buy government or corporate bonds and live off the coupons (interest) of fixed interest securities. But even the 10-year UK government pays less than 3.5% a year before tax.

Another option is to become a landlord by renting the property to a tenant. As a young person, I have seen the damage that renters can do, both to the property and to the owner’s finances. Simply put, this route is not for me.

I like to share dividends

As a stock investor since 1986/87, my favorite form of passive income has been stock dividends. This is a regular cash payment paid by the company to its shareholders.

The biggest problem with dividend investing is that most UK listed companies do not pay dividends. Happily, almost all member companies from FTSE 100 index pays dividends, so this is where I hunt for the biggest payouts.

Another problem is that future dividends are not guaranteed, so they can be canceled or cut without notice. Indeed, dozens of companies are doing this during the pandemic panic in 2020. However, total FTSE 100 dividends for 2023 are forecast to reach a new annual record of £85.8bn.

Therefore, to increase our passive income over the next decade, my husband and I want to invest heavily in dividend-paying stocks. In doing so, we aim to claim a greater share of the torrent of cash generated by large, profitable companies.

For example, let’s say we want to buy a variety of different dividend stocks. Let’s say it has an average dividend yield of 5% per year. So, every £10,000 we invest will generate an additional £1,000 in passive income.

To generate an additional £12,500 of unearned income, we need to invest another £250,000 into dividend stocks. And this is now our main financial goal for the next five to 10 years!