The current State Pension of £8,767 is unlikely to be sufficient for most retirees to enjoy financial freedom in older age. For example, someone earning the living wage in the UK of £9.30 per hour would have a salary of around £17,000 per annum if they worked a 35-hour week.
As such, obtaining an income beyond the State Pension in retirement may be crucial for a wide range of people. Here are three simple steps that could help you to achieve that.
Start planning today
Although it is never too late to start building a retirement nest egg, it is better to start as early as possible. This affords you a greater amount of time to save capital, as well as for the power of compounding to impact on your returns.
Clearly, living within your means is difficult throughout your working life. The cost of living has risen in recent years, while wage growth has not always been positive after inflation is taken into account. However, even saving modest amounts of money on a regular basis can make a significant impact on your retirement plans.
Determine a time horizon
One of the challenges facing many people is deciding where to invest the money they have saved. For example, they may hold it in a savings account due to its low risks. Or they may seek to gain a higher return, with more risk, from the stock market.
When investing in shares, it is crucial to have a long-term view. That way, there is time for your stocks to recover from any downturn or bear market. Furthermore, a long time horizon provides the opportunity that many companies require to deliver on their strategies and for investor sentiment to improve as a result.
The track record of indexes such as the FTSE 100 shows that a high-single-digit annual return is achievable over the long run. Therefore, investing a portion of your retirement portfolio in stocks could help you to build a larger nest egg than would be the case with lower-risk assets.
Consider income shares
With interest rates being close to historic lows, and likely to remain so over the coming years, income stocks could be a worthwhile investment. A large proportion of the total returns of the stock market have historically been from the reinvestment of dividends, which means that income stocks could help to build your retirement nest egg.
They also provide a more generous level of income than other assets such as cash and bonds. As such, they may offer a higher passive income in retirement that affords you a greater sense of financial freedom. Although risks are higher than for other mainstream assets, through diversifying across a range of dividend shares, you may be able to reduce overall risk over the long run.
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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.