The State Pension currently amounts to around £8,541 per year. For most people, this will be an insufficient amount to enjoy financial freedom in retirement, especially given that the average salary in the UK is around £28,000 so people have got used to living on much more. Unfortunately too, the age at which the State Pension is payable is set to increase to 68 over the next two decades.
As such, it may become increasingly important for individuals to put in place their own arrangements when it comes to retirement income. Building a nest egg may not be especially easy, but here are three ideas that could make the task easier.
Dividends
With the FTSE 100 having experienced a period of heightened volatility in recent months, the reality of investing in shares may have hit home for many investors. After a decade of growth, it is now clear that capital growth is not a given when it comes to investing in the stock market.
As such, focusing on dividend shares, and especially companies with a track record of dividend growth, could be a shrewd move. When compounded, they may provide strong and stable growth over a long time period. This could offer a higher chance of generating a sizeable nest egg by retirement.
Geographic diversity
Brexit has also made it clear that investing in a local economy may not always be the best idea for investors. Brexit could prove to be a good thing for the UK economy in the long run, and it could catalyse a number of industries across the country. But so far, it seems to have caused a degree of uncertainty, with a number of UK shares coming under pressure due to their lack of geographic diversity.
As a result, it may be prudent for investors to buy shares in companies that operate in a variety of regions. Not only could this reduce the risk of their portfolios, but it may also provide higher returns potential. At a time when the UK is set to deliver GDP growth of around 1% to 1.5% this year, countries such as India are due to grow by around 8% per annum over the next few years. Investing internationally can allow investors to capitalise on fast-growing economies across the world, as well as cutting the overall risk.
Mid-caps
While many investors may wish to focus on the FTSE 100, mid- and even small-cap shares can offer superior return prospects in the long run. Historically, they have outperformed the FTSE 100, with the FTSE 250 recording annualised total returns of over 10% in the last two decades. This compares to an annual return of around 5.5% for the large-cap index.
Certainly, smaller companies can be more volatile and riskier than their larger peers. However, for an investor with a long-term view who does not require an income for a number of years, such companies could be worth a closer look.
