Building a passive income with UK shares that can beat the State Pension could be far easier than alternative methods. After all, the FTSE 250 and other indices have long track records of delivering higher returns than other popular investment vehicles like bonds.
With the stock market in a bit of a tailspin this year, many businesses have seen their share prices plummet. And that includes those seemingly performing admirably despite investors’ fears. As unpleasant as it is to watch, the 2022 correction has created plenty of buying opportunities, unlocking the potential for a much larger nest egg in the coming years.
Building a passive income with cheap UK shares
The stock market has a 100% success rate of recovering from even the direst of financial crises. And studies have shown that after every downturn, the recovery process can be swift and lucrative for investors able to spot the bargains.
Since the start of 2022, the FTSE 250 index is down around 18%. And many of its constituents have been hit even harder.
There is no doubt in my mind that a collection of these businesses are in trouble, especially those with heavy debt burdens, as interest rates rise. However, I’m also confident that there are far more simply caught in the panic-selling crossfire. And this suggests these UK shares could be set to profit from a long-term stock market recovery.
Obviously, there is no guarantee that individual stocks will return to their former glory to generate a meaningful passive income. The current economic environment poses many new challenges that haven’t been seen in over a decade. And that could result in further short-term volatility as companies try to adapt to the situation.
But for the stocks that eventually succeed, these share price fluctuations may create even more buying opportunities. By investing capital in small chunks over time rather than a single large block, I’ll be able to snatch up more stocks in amazing UK companies as the price falls.
This, in turn, brings down my average price paid, thereby further maximising my returns generated in the eventual stock market recovery. The result is a more substantial nest egg and passive income for retirement.
Better than the State Pension?
Today, the full UK State Pension offers a grand total of £185.15 per week. That’s £9,627.80 per year. Relatively speaking, it’s not a lot of money. And for many, it’s insufficient to achieve financial freedom during retirement.
Fortunately, passive income from shares can come to the rescue. The FTSE 250 has delivered an average return of around 11% annually in the last decade, including dividends. If I were to invest £500 a month at this level for 30 years, my portfolio would grow to £1,402,260. And at the standard 4% retirement withdrawal rule, that means passive income of just over £56,000 – 482% higher than the State Pension today (although of course, I don’t know what the State Pension will be in 30 years’ time).
Investing in UK shares after a stock market correction like that we’re currently experiencing could push those returns even higher. There’s the risk of wealth disruption from future stock market crashes. And my nest egg may not reach this level. But given that financial freedom is the reward, this risk seems well worth it to me.
