Retiring on a growing passive income may be a more realistic prospect than many UK investors realise. After all, the stock market has a long track record of growth that can turn even modest regular investments or lump sums into surprisingly large nest eggs over the long run.
Furthermore, following a value investing strategy such as that used by Warren Buffett could produce even greater returns. Through buying high-quality companies when they trade at low prices, an investor can generate market-beating returns that have a positive impact on their financial future.
Making a passive income from a standing start
Individuals who do not have any retirement savings may be concerned about their capacity to make a passive income in older age. After all, the State Pension is unlikely to provide a sufficient level of income to sustain even the most frugal of lifestyles.
However, starting to invest in the stock market now could lead to a large nest egg from which an income can be drawn that supplements the State Pension. For example, the FTSE 250 has produced annualised total returns of around 9% over the past 20 years. Assuming a 40-year old with no retirement savings achieves a similar rate of return on a £500 monthly investment would produce a nest egg valued at £760,000.
From this portfolio, a 4% annual withdrawal would provide a passive income of over £30,000. Such a withdrawal would also mean that an investor’s capital can continue to grow to rise in value to provide a growing income in older age. This may become increasingly important in the coming years if inflation rises to a higher level.
Following Warren Buffett’s investing methods
While achieving the same return as the stock market can provide a worthwhile passive income in retirement, following Warren Buffett’s strategy could lead to even higher returns. He has outperformed the stock market over many decades through using a simple strategy that focuses on purchasing high-quality companies when they trade at low prices. This enables him to capitalise on temporary mispricings in the stock market, as well as to benefit from the long-term growth of equities.
At the present time, there appear to be numerous opportunities to follow Warren Buffett’s methods. Many sectors in the FTSE 350 are currently unpopular among investors, which means they have low valuations. For example, resources companies and retailers offer low valuations. Although they face tough operating conditions in the short run, they could provide recovery potential in the long run that leads to a rising share prices and a growing passive income.
As such, through buying cheap shares in strong businesses, it is possible to outperform the stock market to produce impressive total returns. This could further improve an individual’s passive income prospects in retirement, and lead to greater financial freedom.