Investing in UK shares may not necessarily produce impressive returns in the short run. After all, risks such as coronavirus, Brexit and political uncertainty in the US could weigh on investor sentiment in the coming months.
However, investing £200, or any other amount, per month in a selection of FTSE 100 and FTSE 250 shares over the long run could produce a surprisingly large nest egg. From it, you can obtain a worthwhile passive income to supplement what continues to be a relatively disappointing State Pension.
The prospects for UK shares
While UK shares currently face an uncertain near-term outlook, their long-term potential to provide an attractive passive income in retirement seems to be significant. Many stocks currently trade at low prices, which suggests that they offer good value for money. In many cases, they appear to have the financial strength to overcome further economic problems that may be ahead in the latter part of 2020. Therefore, they can go on to benefit from a likely recovery for the stock market in the coming years.
Although a return to the stock market’s previous highs may currently seem unlikely, indexes such as the FTSE 100 and FTSE 250 have excellent track records of recovery. Even after their very worst periods of decline, they have experienced improving investor sentiment as companies’ financial performances respond positively to an improving economic outlook. Therefore, buying stocks when they are cheap could prove to be a means of generating relatively high returns in the long run.
Investing for a passive income
Clearly, many UK shares have postponed or cut their dividends in recent months. This is in response to difficult operating conditions caused by coronavirus in many cases. However, it is still possible to obtain a generous passive income from the FTSE 100 and FTSE 250 that is significantly higher than that available from other mainstream assets, such as cash and bonds.
Furthermore, many investors are likely to have long-term outlooks when investing for retirement. Over a period of years, many stocks are likely to resume dividends and could even provide dividend growth as the economic outlook gradually improves.
Regular investing
Therefore, buying a selection of UK shares now could lead to a growing passive income over the long run. For example, investing £200 per month at an annualised return of 8% (which is the same rate of return as the FTSE 100 has achieved since inception) would produce a nest egg valued at £413,000 over a 35-year time period. From this, a 4% passive income of £16,500 could be achieved.
This amount is currently higher than the £9,100 annual State Pension payments that are currently paid. Therefore, it could make a significant impact on your financial position in older age, and help you to enjoy greater financial freedom in retirement.