Starting to invest money in UK shares at age 40 could lead to a surprisingly generous passive income in retirement.
Certainly, that prospect may sound unlikely after the recent stock market crash. It has left the FTSE 100 and FTSE 250 trading 20%+ lower than they were at the start of the year. A result of weak investor sentiment and uncertain operating conditions.
However, by investing in a basket of British shares on a regular basis, an investor can benefit from the stock market’s high single-digit returns likely to compound as the economic recovery takes hold.
Compound returns from UK shares for a passive income
The stock market crash could make UK shares appear to be a risky means of obtaining a passive income in retirement. However, periods of decline are part of equity investing. For example, the FTSE 100 has experienced numerous corrections, downturns and bear markets since its inception in 1984.
Notable declines have included the 1987 crash, the dot com bubble and the global financial crisis. Yet, the index has produced total annual returns of around 8% over the past 36/37 years.
Therefore, an investor who has a long timeframe before retirement can benefit from the stock market’s growth potential to build a worthwhile passive income. Consistent high single-digit returns can amount to a large nest egg. This is due to the impact of compounding.
Moreover, investing while many UK shares are priced at cheap levels could provide even greater scope for capital appreciation. It may lead to a larger nest egg from which a greater income can be drawn in older age.
Investing money for the long run
Investing money regularly in UK shares can produce a surprisingly large passive income in retirement. For example, investing £300 per month from ages 40-67 at the FTSE 100’s historic annual return of 8% could lead to a portfolio valued at almost £350,000. From that, a 4% annual withdrawal would mean an income of around £14,000 per year.
Clearly, it’s possible to build a larger portfolio and a bigger income over a longer time period. Or by investing more money in shares each month. However, the example serves to show what an investor aged 40, or someone who has a long time horizon, can do. This can be achieved even with no retirement savings. They can still enjoy a worthwhile income to supplement the State Pension.
The stock market crash is causing many high-quality UK shares to trade at low prices. That means now could be the right time for an investor to start considering their passive income in retirement.
The sooner this process is started, the more potential there is for compounding. Indexes, such as the FTSE 100 and FTSE 250, have always posted fresh record highs after their declines. So the stock market could offer stronger return potential than investor sentiment currently suggests.
The post No savings at 40? I’d invest £300 a month in UK shares to retire on a £14,000 passive income 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