While the State Pension may be inadequate today, it could become even less appealing over the coming years. In fact, the State Pension age is due to rise to 68 over the next couple of decades, while its growth rate could realistically come under pressure as its affordability becomes a greater concern for the working population.
As such, planning for a minimal State Pension in retirement could be a sound move. In its place, many people will require a large nest egg from which to draw a passive income in older age.
Here are three steps you can take in order to improve your chances of achieving that goal, and of enjoying financial freedom in older age.
While contemplating tax before you start investing may seem illogical, investing through the most tax-efficient accounts can improve your long-term returns.
For example, at the present time the dividend allowance stands at just £2,000 per annum. For someone who invests over a period of decades, this may mean they are liable for tax on their income when they purchase shares through a bog-standard share-dealing account.
As such, it is prudent to use your ISA allowance of £20,000 per annum, or invest through a SIPP. Both products offer a significant amount of tax efficiency, which could lead to a larger nest egg by the time you choose to retire.
Deciding which shares to buy can be a challenging process, since there is a huge range of choice in terms of geographies, industries and types of businesses available. As such, it may be prudent to focus on a number of sectors where you think there is a long-term growth trend on offer.
For example, a rising world population that is ageing could mean that the healthcare industry offers favourable prospects. Likewise, the growth in wages across the emerging world may mean that consumer goods companies experience a rise in demand for their products.
By focusing on a number of themes, you may be able to outperform the wider index. In doing so, you could increase your overall returns which, when compounded, may lead to a larger retirement nest egg.
While reducing risk may not be the most exciting part of investing, over the long run there are likely to be several bear markets and downturns. As such, protecting your capital where possible is a must for all investors.
The simplest way to achieve this goal is to buy a range of stocks that operate in a variety of locations and different sectors. This means that you will reduce the risk of one company’s poor performance affecting your overall portfolio, as well as limit your exposure to one or more economies should they experience a challenging period.
Through reducing risk, you could increase your chances of building a large nest egg in order to retire early and become less dependent on the State Pension.
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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.