Making a worthwhile passive income in retirement by investing just £100 per month may sound unlikely at first glance. After all, a substantial amount of capital is required to obtain even a modest income on a regular basis.
However, through regularly buying a diverse range of shares, you could build a surprisingly large nest egg. Over a long period, it could help to pay for your retirement and improve your overall financial prospects.
Making a passive income from cheap shares
The recent market crash may have dissuaded some investors from buying shares to make a passive income. However, the track record of the stock market suggests buying cheap shares is a sound means of obtaining relatively high returns in the long run.
The world economy has always recovered from recessions to return to growth. Similarly, depressed stock prices have offered buying opportunities for long-term investors ahead of their recovery.
As such, now could be the right time to start investing regularly in stocks. In many cases, high-quality businesses with competitive advantages over their peers and solid financial positions are currently trading significantly below their long-term average prices.
This may provide investors with the chance to buy them at a price that’s below their intrinsic values. In doing so, you could profit from their likely recovery and build a retirement nest egg that provides an income in older age.
Building a diverse portfolio of stocks
Of course, not all undervalued stocks will experience recoveries that allow you to make a passive income in retirement. Some companies will inevitably struggle to survive what could be a tough year for the world economy. Other companies may find it difficult to adapt to what seem to be rapidly-changing consumer tastes across many industries.
As such, it’s important to diversify your portfolio across a range of stocks and sectors. This limits company-specific risk, which is a reliance on a small number of companies to produce your returns. A more diverse portfolio may also deliver higher long-term returns due to its exposure to a wider range of growth areas.
Buying cheap shares today may enhance your long-term returns and boost your passive income prospects. However, even the market rate of return could help you to enjoy financial freedom in older age.
For example, the stock market has delivered a high single-digit annual total return over recent decades. Assuming the same return on a £100 monthly investment would produce a portfolio valued at around £350,000 over a working life of 40 years. From that, an annual withdrawal of 4% would produce an income of £14,000.
Clearly, not every investor has 40 years left until they retire. However, the example serves to show that even obtaining the stock market average return over the long run can lead to a surprisingly large nest egg. Furthermore, by investing in a diverse range of cheap shares, you could beat the market and earn a higher passive income in retirement.
The post How I’d make a passive income with just £100 a month appeared first on The Motley Fool UK.
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Motley Fool UK 2020