The recent stock market crash may have dissuaded some investors from buying UK shares to build a retirement nest egg. However, the past performance of the stock market suggests that a recovery is very likely, and that it has the potential to offer impressive returns in the long run.
With the State Pension being an inadequate means of providing financial freedom in older age, starting to buy cheap FTSE 100 and FTSE 250 shares in a Stocks and Shares ISA today could improve your retirement prospects.
Regular investing in UK shares
Investing £200 per month in UK shares may not seem to be sufficient to provide a worthwhile passive income in older age. However, the past performance of the stock market suggests that it can lead to a surprisingly large nest egg in the long run.
For example, the FTSE 100 has produced an annualised return of around 8% since it was formed in 1984. Assuming that rate of return continues in the long run, a £200 monthly investment could turn into a nest egg of £270,000 over a 30-year period. From this, an annual income amounting to 4%, or £10,875, could be withdrawn. This could significantly increase your income in older age, and reduce your reliance on the State Pension.
Starting to invest today
Of course, UK shares could produce even higher annual returns than 8% in the coming years. The recent market crash means that many FTSE 100 and FTSE 250 stocks currently trade on valuations that are significantly below their historic averages. Through buying them while they are at low levels, investors can benefit from a likely recovery in the stock market.
While the prospect of a recovery may seem distant right now, the track records of the FTSE 100 and FTSE 250 suggest that they are set to make new record highs. After all, they have always recovered from their very worst bear markets to enjoy sustained bull runs. Therefore, buying now while investor sentiment is weak could be a means of benefiting from improving prospects in the coming years.
A Stocks and Shares ISA
Buying UK shares through a tax-efficient account such as a Stocks and Shares ISA is a logical move compared to using a bog-standard share-dealing account. It means that your tax bill both before and after retirement will be kept to a minimum. ISAs are easy to open online and their low dealing and management costs make them accessible to almost all investors.
With the State Pension age set to rise, and the amount paid being inadequate to fully fund a retirement, the stock market could provide a means of enjoying financial freedom in older age. Through investing regularly in undervalued stocks in an ISA, you could build a surprisingly large nest egg that provides a passive income in retirement.
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.