With many UK shares currently trading cheaply, now could be the right time to buy a diverse range of them for the long run. They could produce impressive total returns as the economy and stock market recover from the challenges they’ve faced in 2020.
Undervalued stocks could even reduce your reliance on the State Pension in retirement. This may be extremely useful at a time when the State Pension amounts to just a third of the average UK salary and the age at which it starts being paid is set to rise.
An underwhelming State Pension
Buying cheap UK shares today could be a means of reducing your concerns about living off the State Pension in retirement. It currently amounts to just over £9,100 per year. That’s unlikely to provide a significant amount of financial freedom for most people in retirement. In fact, it may be insufficient to fund even the basic necessities for most retirees.
Furthermore, the age at which the State Pension is paid is set to increase over the long run. This means many working people may not receive payments until they’re almost 70. As such, planning for retirement through building a nest egg could be a means of reducing your dependence on the State Pension in older age.
Buying UK shares
Clearly, the prospect of buying UK shares may not appeal to everybody after the stock market’s exceptionally volatile first half of 2020. However, the track record of indexes such as the FTSE 100 and FTSE 250 shows they’ve always recovered from their lowest points to produce relatively high returns in the long run. For example, the FTSE 100 has delivered an annualised total return (including dividends) of around 8% since its inception in 1984.
Achieving that rate of growth could be a realistic goal for many investors. Although some stocks have recovered following the recent market crash, many others continue to trade at cheap price levels. Buying a range of them ahead of a likely recovery for the stock market and the economy means you could benefit from improving investor sentiment that pushes their prices significantly higher.
Relative appeal
Buying UK shares could prove to be a much more effective means of overcoming a weak State Pension. Certainly more than other assets such as cash, bonds, and buy-to-let property. Low interest rates are also set to remain in place for some time.
This means returns on cash and bonds could prove to be disappointing. Meanwhile, buy-to-let property could be subject to a slower rate of growth in the medium term, as high house prices limit their affordability.
As such, now could be the right time to build a portfolio of FTSE 100 and FTSE 250 shares. It could improve your retirement prospects and reduce your worries about living off the State Pension.
