Over the last two months, the broader UK equity markets have surged well over 20%, showing a reasonably quick recovery following the crash in March. Many people are wondering if they should start investing in stocks to enjoy more income in retirement. I believe now is a great time to invest and participate in the growth of our economy as well as in share prices.
Even if you only have a few pounds to spare every week, you can invest for considerable wealth in your golden years. Believe it or not, the power of compound interest can transform even small amounts into remarkable sums in retirement years.
Investing in FTSE shares
First a bit of terminology for those who are thinking of investing in the stock market. The London Stock Exchange (LSE) is the primary stock exchange in the UK and the largest in Europe.
As described on the LSE website, the “FTSE (pronounced Footsie) Group is an independent organisation jointly owned by the Financial Times and the London Stock Exchange.” It has several indexes of shares covering not only the UK but also other global markets.
The most famous index in the UK is the FTSE 100, which began in 1984. Most companies are multinational conglomerates.
The FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus so they are more directly affected by shorter-term developments in the UK economy.
The wide range of companies in the two indexes enable us to invest in different ways. For example, there is the opportunity to invest in FTSE 250 growth companies with a long-term horizon. It is also possible to find established FTSE 100 companies with stable cash flows and robust dividend payouts.
My Motley Fool colleagues regularly point out that, over the long run, the stock market returns about 6% to 8% annually, on average.
You can be wealthy in retirement
Let’s assume that you are now 30 years old with £5,000 in savings and that you plan to retire at age 65.
You decide to put that £5,000 in a fund now and make an additional £5,000 of contributions annually at the start of the year. You have 35 years to invest. The annual return is 6%, compounded once a year. At the end of 35 years, the total amount saved becomes £629,034.
Investing £5,000 a year would mean being able to put aside around £417 a month or about £14 a day. Might you just be wondering if you should skip that next impulse purchase?
If you could increase your annual contributions to £6,000, then the total would be £747,155.
Over time, your investing returns will always be a function of what you put in. The more you can contribute regularly, the more money you can have in your retirement years.
You may want to take advantage of monthly direct deposits into your investment account. Such recurring transactions force you to continually invest in the stock market in both good and bad times.
What I’d buy
It’s important that you build a retirement portfolio to secure your future. There are several companies I’d consider investing in. In the FTSE 100, they include AstraZeneca, British American Tobacco, Flutter Entertainment, National Grid, and Unilever.
In the FTSE 250, I like ConvaTec Group, Cranswick, Dechra Pharmaceuticals, and Softcat as potential long-term investments.