Having multiple streams of retirement income can drastically improve a quality of life. And instead of leaving pension savings in the bank, investors can put it to work within the stock market to start earning chunky income.
Obviously, this comes with added risks compared to a savings account. Shares can be volatile, and not all of them live up to expectations. However, when executed prudently, a stock investing strategy can drastically increase the size of a pension pot, as well as earn far more than what the current State Pension offers.
In fact, with £50k of capital sitting in the bank, investors could eventually turn that into a £94,000 retirement income. Here’s how.
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Adopting a long-term focus
To claim the State Pension, investors need to be at least 66 years’ old. And assuming an investor plans to retire at this age, that means there’s still plenty of time for individuals aged 40 to deploy a long-term investing strategy.
The FTSE 100‘s historically delivered an average return of around 8% a year. So £50,000 invested today could be worth just shy of £400,000 in 26 years’ time. And following the 4% withdrawal rule, that’s the equivalent of a £16,000 annual retirement income just with passive index funds. For reference, the current full State Pension sits at just over £11,500 a year.
There are a few caveats to consider here. Firstly, the State Pension’s likely to be quite different three decades from now. And the FTSE 100 may not actually continue to deliver its long-term average return. In the last 10 years alone, the UK’s flagship index has actually underperformed due to a lack of growth, delivering only around 6% per year.
Therefore, investors may end up with less than initially expected. But if the FTSE 100 can’t be trusted to deliver, what’s the alternative?
Improving return prospects
Instead of mimicking the average returns delivered by the stock market, investors can instead opt to take things into their own hands and buy individual stocks. This strategy comes with higher risk and requires significantly more attention to detail as well as discipline. But it also opens the door to significantly higher potential returns.
Take Ashtead Group (LSE:AHT) as an example. Over the last 26 years, the equipment rental company’s share price has skyrocketed by 2,500%! That’s the equivalent of a 13.4% annualised return. And when paired with an average dividend yield of 1.5% over the period, the total return is increased to roughly 14.9%.
Some £50,000 invested at this rate for 26 years equates to a £2.35m portfolio generating a £94,000 retirement income!
The bumps along the way
Ashtead’s journey of stellar returns hasn’t been smooth. The stock’s tumbled more than 50% multiple times along the way.
Suffering massive declines is part of the investing journey. But as Ashtead’s demonstrated, a high-quality company can make it through the chaos and emerge as a long-term winner.
It’s unlikely this enterprise will repeat its historical performance. After all, it’s a significantly larger company today than 26 years ago, making quadruple-digit growth far more challenging.
But there are other companies following in its footsteps. And investors able to identify these long-term winners today could be set to reap enormous returns in the future.
