The State Pension is undoubtedly a welcome financial boost in retirement. An extra £164.25 per week is likely to provide additional resources to enjoy older age. However, it is unlikely to be sufficient on its own to provide financial freedom or security. As such, most people are likely to require another source of income in retirement.
While achieving this may seem like a daunting task, the reality is that investing just £5 per day during an individual’s working life could make a real difference to their finances in retirement. And with investing in shares now being easier than ever, doing so is achievable for anyone who wants to boost their financial prospects in retirement.
Investment potential
Investing £5 a day in the stock market equates to £1,825 per year. In previous decades, such an amount may have been deemed too small to invest in shares as a result of commission costs. Minimum charges may have meant that regular investing was not possible as a result of fees significantly eating into returns.
Now though, online share-dealing means that it is possible to invest small amounts regularly, without fees hurting long-term returns. And since there are numerous tax-efficient products such as ISAs, Lifetime ISAs and SIPPs available, it is possible to avoid capital gains and dividend taxes when investing for retirement.
Return potential
While buying and selling shares may seem daunting to many people, the reality is that over the long-term, major indices have strong track records. The FTSE 250, for example, has risen from a price level of 4,850 around 20 years ago to trade at around 18,750 today. That’s an annualised return of 7%. When dividends are added, the total return is close to 10% per annum.
Assuming that an investor is able to buy a diversified portfolio of FTSE 250 stocks that provides the same level of return in the long run as has been the case in the last two decades, they may be able to generate a portfolio worth over £800,000 during their working life. This assumes that they will work for 40 years, with a longer timeframe providing a larger nest egg as the impact of compounding will be more significant.
Income potential
If an individual retires with a nest egg of around £800,000, they may be able to generate a sustainable income of around £32,000 per annum. This assumes that they withdraw 4% of their capital each year, which could allow the portfolio to continue to grow over the long run. Since this is around 3.75 times higher than the State Pension, it seems clear that investing in a sustained manner over a long period could significantly reduce an individual’s reliance on the State Pension.
Even for investors who no longer have 40 years until retirement, investing in a diverse range of stocks could be a shrewd move. Doing so could improve your financial prospects in older age, and lead to less worrying about how to fund your older age in the meantime.