The days of saving money to make a worthwhile passive income in retirement appear to be over. The Bank of England’s decision to lower interest rates to almost zero means cash savings accounts are likely to offer a negative return after inflation has been factored in. This could mean savers experience a loss in spending power that reduces their financial freedom in older age.
Therefore, investing money regularly in UK shares, rather than in cash savings, could be a sound move over the coming years. They offer significantly higher return prospects, and could be a means of obtaining a generous income in retirement.
Investing in UK shares to make a passive income
The difference in passive income from investing money in UK shares versus cash savings accounts is perhaps best served by an example. At the present time, it’s difficult to obtain an easy-access savings account that provides a return of more than 1%. On a weekly savings of £50, a 1% annual return means that a total nest egg of around £90,000 would be produced over a 30-year time period.
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By contrast, the FTSE 100 has produced an annual total return of around 8% since its inception in 1984. Assuming the same return in future on a £50 weekly investment would mean a nest egg of £325,000 over a 30-year period. That’s an impressive 3.6 times higher than the amount under the cash savings scenario. And, with a 4% withdrawal being the norm within a retirement portfolio invested in stocks, a passive income of £13,000 could be enjoyed in older age.
Of course, the above examples assume that UK shares produce the same returns in future as they have done in the past. They also assume that interest rates don’t rise in the future, which they could do. However, it serves to show that buying FTSE 100 stocks is likely to be a better means of making a passive income in retirement versus cash savings.
Buying opportunities for the stock market rally
While UK shares have made gains in recent weeks, it’s still possible to buy cheap stocks to make a passive income in retirement. Companies such as Barclays, Sainsbury’s and Barratt continue to trade at low price levels that may undervalue their long-term prospects.
Similarly, over the long run, companies such as Whitbread, Aviva and Land Securities are likely to experience improving operating conditions. And that could stimulate their profitability. This may mean they can command higher valuations. Especially as investor sentiment improves following the 2020 stock market crash.
As such, now could be the right time to avoid saving money through a cash savings account for retirement. UK shares could offer superior returns that ultimately lead to a larger nest egg. And also a more attractive passive income in older age.
