Making a passive income that beats the State Pension in retirement could be made easier through investing in a diverse range of UK shares. Historically, indexes such as the FTSE 100 and FTSE 250 have offered higher returns than other popular assets such as cash and bonds. They also offer greater accessibility than buy-to-let investments.
Following the stock market crash, many British shares are trading at low prices. As such, investing money in them now may provide greater scope for high capital returns. And that leads to a larger nest egg in the coming years.
Buying UK shares to build a passive income
The long-term recovery prospects of UK shares after the stock market crash could mean they offer scope to produce a worthwhile passive income in retirement. For example, the FTSE 100 and FTSE 250 currently trade 15-20% below their levels from the start of the year.
Many of their members are trading at even bigger discounts to their 2020 starting prices. This suggests they could benefit from a long-term stock market recovery.
Clearly, there’s no guarantee the stock market will return to its previous highs to produce a worthwhile passive income. Furthermore, risks such as Brexit and a challenging economic outlook may mean paper losses in the short run.
However, investing regularly for the long term could take advantage of stock market volatility. It may mean purchasing shares as they fall, thereby obtaining a lower average price from which capital gains can be made.
With the stock market having a long track record of recovering from its variety of downturns, a long-term horizon is likely to mean sufficient time for it to deliver a turnaround. This could allow today’s investments in UK shares to produce a generous nest egg. And that should provide a passive income to be drawn in retirement.
Beating the State Pension
Of course, obtaining a passive income in older age may become more important as a result of the somewhat disappointing State Pension. It currently amounts to around a third of the average UK salary. And that could prove insufficient to provide financial freedom in older age.
Assuming an 8% annual return (which is in line with the FTSE 100’s past performance) is obtained on a monthly investment of £250, a nest egg of £375,000 could be generated over a 30-year time period. From this, a 4% annual withdrawal would amount to £15,000.
However, investing in undervalued UK shares after the stock market crash could lead to higher returns. And a larger passive income in retirement. They may have greater scope to deliver capital gains, since they’re starting from a relatively low price level.
Therefore, now could be an opportune moment to start investing regularly in a diverse range of FTSE 100 and FTSE 250 shares. Certainly while they continue to offer wide margins of safety in many cases.
The post How I’d invest £250 a month in UK shares for a passive income that beats the State Pension 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 2020