Things are looking increasingly bleak when it comes to the State Pension. It’s why for years I’ve been building a portfolio of cheap British shares to target a comfortable retirement.
Sky-high national debt and a rapidly growing population mean the government is struggling to balance the books. But I’m not panicking. History shows that regular investment in UK shares can make investors a fat stack of cash to retire on.
Pension problems
To quickly recap, the State Pension age is scheduled to rise over the next couple of decades. It will rise to 67 between 2026 and 2028, and again to 68 between 2044 and 2046.
Yet I’m taking these projections with a pinch of salt. And I’m not the only one. Speculation is mounting that older citizens will have to wait longer and longer for their benefits (although that’s not certain, of course).
Fresh comments from work and pensions secretary Mel Stride have added to these fears. He claimed last week that the UK will have to “grasp the nettle” after the next general election and bring forward plans to raise the State Pension age to 68.
Big passive income
I don’t plan to carry on working until I’m knocking on a door numbered 70. And when I finally get to draw on my State Pension I want to ensure I have enough money to live comfortably.
This is why I invest in UK shares whenever I can. Okay, the earlier an individual starts their investing journey, the better. But even those who don’t get going until middle age still have a chance to make a healthy passive income for retirement.
History shows us that British stocks provide an average annual return of at least 8% over the long term. This means that someone aged 40 who begins investing £350 a month could, by the age of 65, have made a decent £307,045.
A sum in this region could provide an annual income of £12,282. That’s based on the tried-and-tested 4% withdrawal rule. This would provide a strong passive income and ensure my retirement nest egg lasted decades.
Millionaires’ row
But I’m trying to outperform the average investor by buying cheap shares. Snapping up undervalued stocks can supercharge long-term capital gains as — in theory at least — the market wises up to this discrepancy and pushes share prices through the roof.
This sort of theory is championed by investing giants like Warren Buffett. His Berkshire Hathaway firm has made an average yearly return of 19.8% since 1965 on the back of it, according to last year’s annual report. And it’s a strategy that everyday investors can also use to boost their long-term wealth.
Let’s say the 40-year-old I mentioned took the Buffett approach and managed that 19.8% yearly return. After 25 years, they’d be sitting on a jaw-dropping £1.92m!
Of course, past performance is no reliable indicator of future success. And investors need to be prepared to endure some turbulence during their investing journey. Even Warren Buffett has made some costly error (like buying Tesco shares during the 2010s) that has damaged his overall returns.
Yet investors who put in the time and effort can still, with the right investment strategy, make life-changing wealth. Just ask one of the UK’s many Stocks and Shares ISA millionaires.
