Making a passive income that doubles the State Pension may sound like an unrealistic goal to many investors. However, investing money in a range of high-quality UK shares could produce impressive results over the long run.
With many FTSE 100 companies currently trading on low valuations even after the stock market rally, now could be the right time to start building a portfolio. Over time, a modest monthly investment could provide greater financial freedom in retirement.
Investing in UK shares to double the State Pension
In the past, saving money on a regular basis provided an opportunity to build a passive income that boosted the State Pension. For example, an individual may have saved £100 per month over their lifetime. At retirement, this could have provided a decent income while interest rates were at historically ‘normal’ levels of 4%+.
Similarly, bonds were an attractive option for those seeking to build an income for retirement. However, interest rates are now at extremely low levels. So that means neither cash nor bonds are likely to provide sufficient returns in the coming years. Certainly not enough to build a passive income that increases financial freedom in retirement.
As such, investing in UK shares is a more realistic means of generating a passive income in older age that boosts the State Pension. Certainly, shares are riskier than cash or bonds in the short run. However, investing in them over the long run has historically been a sound means to build a portfolio from which an income can be drawn in older age.
Investing money on a regular basis to make a passive income
Historically, investing money in UK shares to make a passive income that boosts the State Pension was too costly for many people to consider. However, today, the cost of buying and selling shares is extremely low due in part to online share dealing. As such, it’s possible to invest £100 per month to produce a portfolio that delivers a generous income return in older age.
In fact, a £100 monthly investment could even double the income many people receive in retirement. The FTSE 100 has produced annual total returns of 8% in its 36-year history. Assuming the same returns in future would turn a £100 monthly investment into a sum of £230,000 within 35 years. From this, a 4% annual withdrawal amounts to £9,200. That’s a similar amount to the State Pension.
Taking a long-term view
Therefore, using UK shares to build a passive income could be a sound means of supplementing the State Pension. Through taking a long-term view, an investor can overcome the short-term volatility inherent in the FTSE 100’s performance.
Over time, it could deliver significantly higher returns than those available from other passive income strategies, such as holding cash or bonds.
The post 3 passive income ideas I’d use to double the State Pension with £100 per month appeared first on The Motley Fool UK.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021