Having no savings at 50 can cause a significant amount of worry for many individuals. After all, the State Pension is likely to be inadequate for many people.
However, it is still possible to generate a generous passive income in retirement through investing in the stock market. By purchasing a diverse range of companies that pay rising dividends, your long-term financial outlook may improve significantly.
Shares versus cash
At age 50, most people are likely to have at least a decade of work until they retire. This means that they may be able to take some risk with their capital, in terms of investing in the stock market instead of holding cash. In other words, if the stock market experiences a rapid decline in the short run, there is likely to be sufficient time for it to recover before a passive income is required in retirement.
By investing in shares, rather than holding cash, you could significantly increase the size of your retirement nest egg. The best returns on cash at the present time are around 1.5%, while the FTSE 100 and FTSE 250 are likely to produce high-single-digit returns on an annualised basis over the long run. On an investment of £100 per month over a 20-year time period, this could lead to a nest egg of £55,000 when invested in shares instead of £28,000 when held as cash.
In order to limit the risks of investing in shares, diversification is crucial. This reduces company-specific risk, which is the potential impact of a decline in the price of a specific stock on the wider portfolio.
Due to falling share-dealing costs over recent years, it is simpler and cheaper than ever to diversify. An investor with a modest sum of money may wish to start off with tracker funds, which aim to mimic the returns of a specific index such as the FTSE 100.
Regular investment services, though, may reduce dealing charges to as little as £1.50 per trade. This could mean that building a portfolio of companies that can outperform the index, while also being diversified, becomes easier for a wider range of investors to achieve.
Although an investor may not require a passive income until they retire, buying dividend-paying shares could prove to be a good move. Historically, the reinvestment of dividends has accounted for a large proportion of the total returns of the FTSE 100. As such, buying stocks that have a generous yield, as well as the potential to grow their dividends at a fast pace, could lead to a larger retirement nest egg.
Clearly, it will take time to build a portfolio that is capable of delivering a passive income that provides financial freedom in older age. However, it is never too late to start building towards that goal, with a diverse range of dividend-paying shares being one possible strategy that could achieve it.
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Peter Stephens 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.
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