The State Pension is unlikely to be sufficient to fund most people’s retirements all on its own. It amounts to just £8,767 per year. While it may grow at a brisk pace over the coming years, it is unlikely to cover a retiree’s living expenses in their entirety.
As such, obtaining a passive income from another source could be imperative for many people. Here’s how you can achieve that goal in three simple steps.
While planning for retirement may not be an easy process, starting as early as possible can be highly beneficial. Whatever you choose to invest in, a longer time period provides a greater opportunity for compounding to have a positive impact on the size of your nest egg.
For example, £1,000 invested in the stock market that produces an 8% annualised return will deliver a nest egg of £4,660 over 20 years. The same investment producing the same annual return would be worth over £10,000 if invested for 30 years.
With it being easier than ever to open a sharedealing account online, and the costs of doing so being relatively cheap, starting to invest your capital for older age today could be a shrewd move.
Invest during uncertain periods
Today may not seem to be the right time to risk losing money on investments. After all, there are major risks facing the UK from the election and from Brexit. The world economy, meanwhile, faces a trade war and geopolitical challenges in Hong Kong and the Middle East. Therefore, there is a chance that the stock market will fall in the coming months.
However, there are always risks facing investors. Despite them, the stock market continues to rise, with it having always recovered from its lowest points. Therefore, investing while the future seems to be uncertain is part of being an investor, since there are always reasons to be optimistic and pessimistic.
Focus on strong businesses
With there being hundreds of companies in which you could invest to build a retirement nest egg, it is difficult to decide which ones are worth buying. One means of doing so is to focus on companies that have strong track records of financial performance. In other words, low debt levels, rising cash flow and resilience during difficult economic periods. They may be better able to overcome possible difficulties in their industries and the world economy in the long run.
Furthermore, solid businesses may deliver more consistent growth. As investors such as Warren Buffett have shown, buying and holding high-quality companies over a period of many decades can produce surprisingly high returns. With there being a wide range of such companies currently trading on low valuations in the FTSE 100 and FTSE 250, now could be the right time to buy a diverse range of them to improve your retirement prospects.
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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.