Enjoying a comfortable retirement is likely to be of high importance to a large number of people. The problem, though, is that the State Pension currently amounts to just £8,767 per annum. As such, it’s unlikely to be a sufficient income for most people to enjoy financial freedom in older age.
Another challenge facing many is the high cost of living and the difficulty of living within your means. Even if you’re able to save an amount such as £50 per month, low interest rates mean the returns on your capital from savings accounts and Cash ISAs are disappointing.
As such, opening a Stocks and Shares ISA could be a shrewd move. It offers the chance to invest tax-efficiently in the stock market, with £50 per month likely to have a significant impact on your long-term retirement prospects.
Opening a Stocks and Shares ISA is a relatively simple and cheap process. However, many people avoid investing in the stock market because they think it is likely to be complex and expensive.
While that may have been true in the past, online sharedealing has made buying shares straightforward and highly accessible to a wide range of investors. In fact, it’s possible to buy a diverse range of shares with a sum of £50 per month through an index tracker fund.
A tracker fund seeks to mimic the returns of a specific index, such as the FTSE 100 or FTSE 250 and, in doing so, offers the chance for an investor to access a similar rate of return to that offered by the index in question. Since both indexes have offered high single-digit annual returns since their inceptions, the returns of tracker funds could make a major impact on your retirement prospects.
Furthermore, tracker funds also provide a high amount of diversity. They essentially offer exposure to the whole index, which is made up of a range of companies operating in different sectors and geographies. This can reduce your overall risk, and may improve your return prospects.
Investing £50 per month in a FTSE 100 index tracker fund could produce a surprisingly large retirement nest egg in the long run. For example, assuming the FTSE 100 delivers a total annual return of 9%, investing that monthly amount could lead to a portfolio valued at £315,000 over a 45-year working life.
Of course, many people may not have a 45-year time period to invest. But the example serves to show the stock market can be accessed with modest sums of capital and, when undertaken on a regular basis with compounding allowed to boost returns over the long run, it can lead to a worthwhile end sum which provides a passive income in retirement.
Therefore, starting to invest in the stock market through an index tracker fund could be a worthwhile move. As your portfolio increases in size, you may wish to consider individual shares to potentially obtain an even higher return than that offered by the wider stock market.
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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.