Times are tough but investing a tiny sum such as £3 a day towards building a second income for retirement is well worth the effort.
That’s relatively small change, all too easily spent. Yet by investing it day after day, year after year, I can really put it to work. The rewards make the effort worthwhile if it’s in any way possible.
Everybody needs a bit of cash in an easy access account for emergencies. But for longer-term retirement savings, I believe my money will work a lot harder in stocks and shares.
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Stocks beat shares over time
Over the last 20 years, the FTSE 100 has delivered an annual average return of 6.89% a year. That beats even the very best cash savings accounts. It also gives me a better chance of protecting the value of my money against inflation.
Over the long run, history shows that equities beat almost every other type of investment. Better still, by purchasing them inside the £20,000 annual Stocks & Shares ISA allowance, I can take all of my capital growth and dividend income free of tax.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
If I invested £3 a day from age 25 and it grew at 6.89% a year, I’d have an impressive £453,989 by age 65. That’s not a bad return from £3 a day. This assumes I increase my contribution by 5% each year, to keep pace with prices.
If I was 45, my £3 a day would have much less time to compound. It would be worth just £70,499 by 65. That is better than nothing but it shows the cost of putting off investing. If I had no savings at 45, I’d be looking to invest much more than £3 a day. If I put away £10 a day instead, I’d have £234,831 by age 65.
These figures are not guaranteed. Stock markets are volatile, and nobody knows how well they will perform in future.
I like high-yield shares
Personally, I like to buy individual stocks rather than investment funds. That way I hope to generate a higher return than 6.89% a year, but not everybody wants to do this. The simplest, cheapest option is to buy a FTSE 100 or FTSE All-Share tracker, and leave that to compound and grow.
Either way, I would reinvest all my dividends back into my portfolio while I was working, then draw them as income after retirement
So how much of a second income can a portfolio of shares generate? Let’s say, to keep things simple, that I had £100,000. Placed in FTSE shares that yielded on average 7% a year, I’d have a second income of £7,000.
Next year, the FTSE 100 Index is forecast to yield 4.4%. That would generate income of £4,400 if I placed my £100k into a tracker fund.
Crucially, in both cases I’d still have my capital intact. Its value will rise and fall in line with the stock market. However, history shows that in the long run it should rise and, with luck, so should my second income.
