With the State Pension age expected to rise to 68 over the next 20 years, building a nest egg that can provide a passive income in older age is becoming increasingly important.
Furthermore, the annual State Pension of £8,767 is unlikely to cover most retiree’s expenses.
As such, starting to invest in high-quality companies today, and continuing to invest through uncertain periods for the stock market, could prove to be a means of improving your retirement prospects.
Due to the impact of compounding on long-term returns, starting to invest as soon as possible could prove to be a sound move. Although there are risks facing the UK and global economies at the present time, there is never a perfect moment to start buying stocks. However, the longer capital is invested in the stock market, the greater its potential to generate a relatively higher return when compounding is taken into account.
For example, investing £100 per month at an annualised return of 8% over a period of 30 years would lead to a nest egg of £136,000. The same amount invested at the same rate over a period of 20 years would produce a portfolio valuation of just £55,000. With interest rates being exceptionally low at the present time, there may be a significant opportunity cost from waiting for the perfect time to buy stocks.
Focus on quality
Buying the highest-quality companies around can prove to be a worthwhile strategy over the long run. Value investors such as Warren Buffett have enjoyed considerable success in focusing on areas such as a company’s competitive advantage and its long-term growth potential.
Assessing the quality of a business is clearly subjective. However, by focusing on its fundamentals, such as its balance sheet, as well as its track record of performance in a variety of economic scenarios, it may be possible to build a picture as to which stocks within a specific industry offer the highest chance of delivering rising profitability. This could produce a higher share price in the long run.
Invest through uncertain periods
Trying to time the stock market can prove to be a difficult and costly experience. Investor sentiment can have a significant impact on stock prices in the short run. Since it is challenging to consistently second-guess how investors view a specific stock or industry due to constant changes taking place, focusing instead on company valuations could be a better idea.
This may naturally mean that an investor is more likely to buy during periods where prices are lower. While this may coincide with uncertain times for the wider stock market, it may allow an investor to ‘buy low and sell high’, which could produce relatively high returns in the long run that lessen their dependence on the State Pension in older age.
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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.