I’m not just relying on the State Pension to fund my retirement, I’m also investing in UK shares. There’s a good reason. The State Pension isn’t enough to guarantee a comfortable retirement. In fact, all it does is keep you out of absolute poverty.
If you want to enjoy your later years rather than worry over every penny, you need savings in your own name. I think UK shares are the best way to build your retirement wealth.
Right now, the full new State Pension pays income of £175.20 per week. That works out as the grand total of £9,110 a year, roughly a third of the national average full-time salary. I don’t fancy living on that, and you probably don’t either.
Don’t rely wholly on the State Pension
It used to be worse before the State Pension triple lock, which guarantees to increase payouts either by earnings, inflation, or 2.5%. This has helped pensioner incomes play catch up. However, unless you want your income to drop sharply when you retire, you still need to save under your own steam. I’m doing that by investing in UK shares.
Some may think the stock market is too risky and therefore not for them. Share prices are volatile in the short term, as we have seen this year. However, in the longer run, history shows equities beat every other asset class.
Since 1925, the UK stock market delivered an average annual total return of 12.5% a year. This includes capital growth from rising share prices and income from reinvested dividends. It has thrashed gold (which grew 7.7% a year), rental property (7.2%), global bonds (6.6%) and cash (4.9%). That’s why I invest in UK shares ahead of anything else.
Many investors underestimate the importance of dividends, the income you get as a reward for investing in UK shares. Most companies aim to increase their payouts year after year, giving you a rising income over time.
Sadly, many dividends are being cut in the pandemic, although some have since been restored. Over the longer run though, dividend income tends to increase ahead of inflation. This should supplement your State Pension nicely.
Invest in UK shares to retire early
I would start by investing in a spread of UK shares from the FTSE 100. While many companies have been hit hard by the stock market crash, others have shown admirable resilience. Look for businesses with steady profits, a competitive edge and, wherever possible, a sustainable dividend.
I’d invest in these UK shares with the aim of holding them for the long term. In other words, throughout your working life, and into retirement.
Invest your dividends back into your portfolio for growth while working and draw them as income to supplement your State Pension after you retire. If you build a big enough portfolio, you might even be able to retire early. You can’t do that with the State Pension.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.