Relying on the State Pension to fund your retirement could lead to a significant amount of disappointment. It currently amounts to just £8,767 per year, which is unlikely to provide financial freedom for most people.
As such, building a retirement nest egg may prove to be essential. The passive income it provides could not only supplement your State Pension, but provide a significant income that delivers financial security in older age.
Furthermore, building a retirement portfolio does not necessarily require significant sums of money. A long-term horizon plus shrewd investments could allow you to double your State Pension for just £5 per day.
The performance of the UK stock market over the long run suggests that an annualised total return of around 8% is highly achievable. Certainly, there will be years where returns are disappointing. However, a patient investor can reasonably expect to generate annual returns that are, on average, in the high-single-digits.
Such a return could provide a large retirement nest egg – even when modest sums are invested. For example, investing £5 per day over a period of 30 years could lead to a retirement fund of around £208,000. From that, a passive income of around £8,600 per annum could be generated from investing in the FTSE 100, which currently yields around 4.2%, and spending the dividends received.
Clearly, investing in the stock market carries a risk of loss in the short run. Financial crises and stock market crashes occur fairly regularly, and could lead to challenging periods for investors.
However, for someone who has many years until they plan to retire, short-term declines in the value of their portfolios may present an opportunity, rather than a reason to be disappointed. After all, they do not plan to generate a passive income from their portfolio until retirement, which means they are net buyers of stocks. A stock market decline could allow them to buy high-quality companies at lower prices, thereby improving their return potential over the long run.
As mentioned, the FTSE 100 currently yields over 4% at the present time. This could mean that the index offers good value for money compared to its historic price level. Risks such as Brexit, a general election and political uncertainty in the US may continue to hold back the index in the near term. However, history suggests that the index will recover from its present challenges, and go on to post record highs.
Therefore, now could be the right time to buy a range of large-cap shares in order to kickstart your retirement plans. You may not require significant sums of capital in order to generate a passive income in retirement that alleviates your reliance on what may prove to be an insufficient 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.