Everybody has different financial goals. Some are looking to supplement their pensions, some to retire a little earlier than they otherwise could. And some aim to create enough passive income to retire very early. Any of these goals can potentially be achieved by investing in UK shares.
The full UK State Pension currently provides just £175.20 per week of retirement income. That’s £9,110 annually. The age at which individuals can claim their state pension is currently 66 and is set to rise to 68 between 2044 and 2046.
Rising life expectancies combined with a smaller working population are likely to add pressure to State Pension funding. This could result in a further rise in the state pension age.
I’d rather not have to rely on the state in my retirement. To provide an additional passive income for life, I’ll need to build a suitably-sized investment pot. I plan to do so by investing in a selection of good-quality UK shares.
How much to invest?
First I’d need to calculate how much passive income I’d need. As an example, let’s say I require £20,000 per year. Next, I’d estimate when I want to start withdrawing an income from my investment. As an early investor, I assume I have 35 years before I want to supplement my pension.
I calculate that I’d need a total investment pot of £500,000 to be able to withdraw a £20,000 income. This is calculated using a commonly used safe withdrawal rate of 4% — that is, the maximum a retiree can withdraw every year without running out of money.
Although £500,000 may seem like a large amount, when I have many years for my investment to grow, one might be surprised how small an investment is required. My calculations suggest that I’d only need to invest £300 per month to reach this goal.
To reach this figure, I assume my investment in suitable UK shares achieves the long-term average stock market return of 7% per year. However, I believe that by learning more and investing wisely, it’s possible to return a far greater return. I’d say that an annual investment return of 10%-15% is quite achievable.
Over a long period like 35 years, the magic of compounding really can significantly enlarge the total investment pot. For example, at a 10% annual return, the investment pot could grow to over £1m instead.
Or put another way, it would be possible to build a £500,000 pot eight years earlier. Thus enabling me to have a £20,000 passive income in 27 years instead of 35 years.
How UK shares can boost investment returns
UK shares include companies of varying types and sizes. I’d say it’s worth considering diversifying investments across small-cap, mid-cap, and large-cap stocks.
By researching UK shares in sources such as The Motley Fool, I like to find companies that demonstrate growing earnings, a strong return on capital, stable cash flows, and a resilient balance sheet.
Stable and established large-cap stocks might include Persimmon, Unilever, and Diageo.
Growing mid-cap stocks could include Volex, Yougov and Strix.
And cheap small-cap stocks might include Sylvania Platinum, Somero Enterprises, and SCS.
