With the State Pension age continuing to rise, making a worthwhile passive income in retirement may become increasingly important for many people.
One means of achieving this goal is to invest in UK shares. Although they have recently experienced a market crash that has sent the FTSE 100 lower, over the long run a diverse range of stocks can produce a surprisingly large nest egg. From that, a generous passive income can be drawn that helps you to enjoy greater financial freedom in older age.
Investing in UK shares to make a passive income
Building a nest egg from which to draw a passive income in retirement may be a simpler and more accessible process than many people realise. Online sharedealing and tax-efficient accounts such as Stocks and Shares ISAs are cheap and simple to set up. Furthermore, regular investment services mean that the cost of buying shares can be as little as £1.50 per trade. This means that investors with modest amounts of money to invest each month can do so.
The past performance of the stock market shows that it can turn modest amounts of capital into a large sum of money. For example, indexes such as the FTSE 100 and FTSE 250 have posted annualised returns that are in the high-single digits since their inceptions. Assuming a similar rate of return of 8%, a £250 monthly investment in UK shares could become a portfolio worth £375,000 over a 30-year time period.
From that portfolio, a 4% annual withdrawal could be made to provide a passive income. This equates to an annual income of £15,000, which could make a real difference to your financial situation in older age.
Starting to buy UK shares today
Of course, making a passive income from UK shares may seem unlikely at the present time. The stock market is currently facing a challenging outlook that could lead to disappointing growth prospects in the short run.
However, its past performance suggests that a recovery from its current position is very likely. After all, it has been able to post new record highs following every one of its previous downturns. And, with there being a lack of other opportunities available due to low interest rates, high house prices and other overvalued assets, the stock market could offer the most attractive means of building a retirement nest egg.
In fact, buying UK shares now while they trade at low prices could be a shrewd move. It may even allow you to obtain higher returns as they recover in the coming years. And that could further reduce your reliance on the State Pension. This could increase the size of your nest egg and have a positive impact on the level of your passive income in older age.