The potential for UK shares to generate a growing passive income in the long run may seem relatively low at the present time. After all, the world economy faces a very uncertain future, while investor sentiment continues to be relatively weak.
However, the long-term growth prospects of the stock market continue to be relatively attractive. By investing money in British stocks today, you could access a high rate of return that leads to a surprisingly large nest egg. This may provide a generous income that enables you to retire early.
The outlook for UK shares
UK shares currently face a number of risks that could dissuade some investors from buying them to make a passive income in the long run. Threats such as Brexit and coronavirus are weighing on investor sentiment, and on the financial performances of a range of FTSE 100 and FTSE 250 shares.
However, over the long run, there’s likely to be a return to economic growth. Fiscal stimulus and accommodative monetary policies are being pursued across major economies. They’ve already helped to stabilise economies, and have the potential to push them towards growth in the coming years.
This situation may seem unlikely to some investors who are seeking to build a passive income portfolio for retirement. However, that same feeling has been present during every other recent recession. And, with the world economy having always recovered from its periods of negative growth, the outlook for British stocks could be more positive than investor sentiment currently suggests.
Generating a growing passive income
The potential for UK shares to produce a nest egg that offers a growing passive income in retirement may be higher now than it has been for a number of years. Investing money in stocks soon after a market crash is a simple means of accessing lower valuations. As with any asset, buying at lower prices can be more profitable than buying at higher prices. As such, now could be the right time to start building a retirement portfolio containing UK stocks.
Clearly, it’s difficult to know which sectors will perform well in the long run. Therefore, diversifying across a range of industries could be a sound move. It may reduce your overall risks and allow you to access a wider range of growth opportunities. This may produce a more consistent growth rate in the long run that leads to a larger nest egg.
Assuming you withdraw 4% of your eventual retirement portfolio for a passive income each year, you could obtain a £25,000 annual income in older age by building a nest egg valued at £625,000. An investor with a 30-year timeframe would need an investment of around £65,000 today, or £500 per month, to achieve that goal if they obtain the average stock market return of around 8%.
As such, a generous retirement income may be a realistic goal for many investors. The economy’s recovery prospects and low stock market valuations may help you to enjoy financial freedom in older age.
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.