Making a passive income in retirement could become a more pressing requirement for many people. The State Pension age is rising. And there are widespread doubts about how quickly its payments will rise due to the increasing cost of the coronavirus pandemic.
Therefore, now could be the right time to start buying UK shares on a regular basis. They have the potential to produce a generous nest egg from which a passive income can be drawn. This could reduce your reliance on the State Pension, and lead to greater financial freedom in older age.
Building a portfolio of UK shares
The disappointing returns on many mainstream assets mean is an issue. They may be unable to provide you with a passive income in retirement that can reduce your dependence on the State Pension. For example, low interest rates mean that the returns on cash and bonds are relatively poor. They may even fail to match inflation over the long run. And this could reduce your spending power in the coming years.
Buy-to-let property may be out of reach for many people. High deposit requirements and the fees associated with a property purchase mean a large amount of capital is required. Meanwhile, gold’s high price means that its potential to deliver impressive capital returns may be limited. That’s especially the case when its price is compared to the low valuations on offer within the stock market.
As such, buying UK shares could be a means of building a nest egg from which a passive income is drawn in older age. The recent stock market crash means that there are low valuations on offer across the FTSE 100 and FTSE 250. Buying cheap shares could even allow long-term investors to outperform the wider stock market. Capitalising on undervalued companies that have strong recovery potential is key here.
Making a passive income in retirement
Investing in UK shares may be the most attractive option for anyone seeking to build a retirement portfolio from which a passive income can be drawn. Even if you obtain the same annual returns as the wider stock market, you could end up with a surprisingly large portfolio that means you are less reliant on the State Pension.
For example, the FTSE 250 has recorded an annual total return of over 8% in the past 20 years. Assuming a similar rate of growth on a £25 weekly investment over a 40-year working life would produce a nest egg valued at around £380,000. From that, a 4% annual withdrawal would equate to an income of £15,200. That’s over 50% higher than the current State Pension.
Clearly, if you have less than 40 years until retirement then the eventual passive income may not be as high as in the above example. However, the example highlights that modest investments in a diverse range of UK shares can lead to large amounts of capital in the long run. Therefore, starting to invest in the stock market on a long-term basis could be a sound move if you are worried about the State Pension and how you will afford to live in retirement.