Accumulating £1m by retirement may seem to be out of reach for many people. They may feel they lack the time, knowledge or experience to build a nest egg from which they are able to draw a second income for use in older age.
The reality, though, is very different. It’s possible for anyone to build a surprisingly large portfolio by the time they retire through following a handful of simple steps. Clearly, the more capital that’s invested, the higher the chance of it eventually reaching seven-figure status. But even modest amounts of cash can provide a worthwhile second income in retirement.
Regular investing
Perhaps the simplest means of building a retirement savings portfolio is to invest regularly. This could be every week, every month or every quarter, depending on an individual’s personal circumstances. Doing so is likely to eventually become a habit, so that the amount invested isn’t missed in terms of its impact on day-to-day spending.
Investing regularly will also force an individual to buy shares during bear markets. This has often been the best time to buy, since it’s possible to buy high-quality stocks when they are trading on low valuations. Many investors will become fearful during such periods, and look to sell rather than buy shares. Doing so may save themselves paper losses in the near term, but could mean that they miss out on capital growth in the long run. By investing regularly, an investor is likely to take advantage of such periods.
Risk level
Every investor is an individual, and every individual has their own tolerance to risk. For some, they will have no issue in buying stocks that exhibit a significant amount of volatility in the short run. As such, they’re happy for their portfolio valuation to swing wildly over a period of months, as long as over the long run it delivers high returns.
Other investors may adopt a more cautious stance and could have difficulty in being faced with a portfolio that has significantly fallen in value. For those investors, lower-risk opportunities may be a better idea, although this could mean their return prospects are lowered.
Either way, deciding what level of risk is comfortable is an important step in putting together a suitable portfolio for the long term. While returns may be more exciting, contemplating risk could be a prudent step to take when it comes to planning for retirement.
Reinvesting
While it may be tempting to spend dividends received from within a retirement portfolio, doing so could harm an investor’s chances of retiring with £1m. Various studies have shown the reinvestment of dividends can have a significant impact on total returns over the long run. Their compounding can also have a major impact on quality of life in retirement.
As such, leaving a retirement portfolio untouched until older age may prove to be difficult at times, since various costs may occur during working age. But in the long run, investing, and waiting, could be the fastest route to a financially-enhanced retirement.