Living comfortably in retirement is a life goal for many people. The problem, however, is it can be difficult to build a nest egg that’s large enough to provide a passive income in older age.
One way of potentially overcoming this challenge is to invest regularly in the stock market. This may sound like an obvious solution, but when done consistently over a long time period it can lead to a surprisingly high passive income in older age.
Modest amounts of capital can add up
The track record of indices such as the FTSE 100 and FTSE 250 show investing even modest amounts of capital can lead to high returns in the long run. For example, in the last decade, the FTSE 100 has recorded an annualised total return of around 8%. This is ahead of most other mainstream assets, while it’s also a highly accessible place to invest for anyone who is looking to build a retirement portfolio.
For example, investing £25 per week in the FTSE 100 during a 50-year working life (assuming you retire at 68) could produce a portfolio valued at almost £750,000, assuming an annualised return of 8%. From this, it may be possible to obtain a 4% income return, since that’s the current dividend yield of the FTSE 100. This would equate to an annual income of around £30,000.
Clearly, the above calculation is a very simple means of looking at what can prove to be a complex problem. For example, many people may not have a 50-year timeframe in which to build a retirement portfolio, while the impact of inflation has not been factored in. Moreover, the FTSE 100 may not deliver an annualised total return of 8% in future.
However, the calculation serves as an example of how modest amounts of capital invested regularly in the stock market can lead to a surprisingly large nest egg, and passive income, in retirement. In addition, it may be possible for an investor to beat the wider index in order to obtain an even higher rate of return. Likewise, they may be able to invest a larger amount each week in order to build their portfolio value at a faster pace.
Either way, products such as a SIPP or a Stocks and Shares ISA make the stock market, and the long-term growth prospects that it offers, highly accessible to any investor. For example, it’s possible to buy tracker funds at minimal cost using regular investing services, while the tax efficiency of wrappers such as ISAs means the net returns available to investors could prove to be highly appealing.
As such, obtaining the retirement income you desire may not be as challenging as it first appears. Through buying shares as early as possible, investing regularly, and doing so in a tax-efficient manner, it may be possible to generate a £30,000 income, or more, in older age.
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Motley Fool UK 2019