Most people will spend more than £164 per week in retirement. Yet that is what the State Pension currently amounts to. And with the age at which it is due to be paid being set to increase to 68 over the coming years, the reality is that many people may be disappointed by their income levels in older age.
As such, it may be more important than ever to build a nest egg for retirement. Here’s how it may be possible to generate greater financial freedom in retirement through investing in shares.
Valuations
As with anything in life, buying shares at a lower price is generally better than buying them at a higher price. Of course, for shares to offer good value for money there normally needs to be a clear reason for the price, whether that is the prospect of a recession, industry challenges or difficulties with the company involved. As such, it can take a degree of courage to buy shares when they are trading at ‘attractive’ valuations.
However, if a stock is high quality in terms of its balance sheet, track record, strategy and management team, then it could offer impressive returns in the long run. Waiting for such shares to come along may take a significant amount of patience, but could be worthwhile for patient investors.
Risk
While in older age it is sensible to reduce risk within a portfolio as a result of the requirement for an income, in younger years it may be possible to take more risk than many investors realise. This doesn’t mean that only high-risk investments should be considered. But with a long-term view it may be possible to recover from potential market setbacks.
Taking risk should, of course, lead to a commensurate rise in return potential. Therefore, a portfolio which is more volatile should provide higher returns in the long run, with uncertainty unlikely to be a major problem for individuals with many years to go until retirement.
Holding period
While the cost of sharedealing has fallen in recent years, the reality is that buying and selling regularly can still lead to high costs. It is also unlikely to allow the stocks within a portfolio to deliver on their strategic goals, which could lead to inferior returns over the long term.
Although buying and selling shares in a short space of time can seem to be an exciting pursuit, the reality is that buying and holding stocks for the long term could provide a more appealing risk/reward opportunity. It may also require less focused research on the part of the investor, as well as a more efficient portfolio.
Therefore, by taking an appropriate amount of risk given an individual’s time horizon, waiting for opportunities to buy undervalued shares and holding stocks for the long term, it may be possible to overcome the income shortfall of the State Pension.