For many people, retiring with £1 million in an investment portfolio would be the ideal way to spend a retirement. If it is invested in high-yielding FTSE 100 shares then it may be possible to obtain a 4% or 5%+ income from such a portfolio over the long term. This could provide an individual with a £40,000+ income in retirement, which could provide a significant amount of freedom to enjoy life.
However, the fact is that generating a £1 million portfolio at retirement is difficult. Here's how any investor could make it easier to do so.
Approach to risk
While risk is often viewed as a negative aspect of investing, it is also true that more risk generally equals greater rewards. This is especially relevant for investors who have a number of years until they plan to retire. In such a situation, they are likely to be in a position to take a relatively high degree of risk - as long as there is an increasing potential reward on offer.
For example, an investor aged 50 or below is likely to have at least a decade until they plan to retire. They could therefore afford to invest in a range of stocks that, while potentially volatile and risky, could generate significantly higher returns than the FTSE 100. And, should they experience a downturn in valuations during the period prior to retirement, they are likely to have sufficient time available to allow their portfolios to recover before they cease working.
Certainly, investing in lower-risk shares and other assets as retirement moves closer is a good idea. But the point is that riskier assets can lead to higher returns, and for investors with a long-term time horizon, they may provide more compelling investment opportunities.
Clearly, saving for retirement is never easy. However, prioritising retirement planning over other expenditure could be easier than many people imagine. For example, a natural response to buying a property is to try and overpay the mortgage each year. This is a good idea because it means less interest is paid over the course of the mortgage, while being mortgage-free could come a lot sooner.
However, the stock market is likely to offer a higher return than the interest payments that would be saved from overpaying a mortgage. At the present time, mortgage rates can be as low as 2%-3%, while the FTSE 250 has delivered a total return of three or four times that amount per year over the last two decades. As such, investing instead of overpaying a mortgage could be a sensible idea.
While retiring with a £1m portfolio is never easy, it is possible to improve your chances of achieving it. Investing in shares that offer higher potential returns, while also diversifying, could lead to greater profits over the long run. And while paying down a mortgage as quickly as possible is a sound idea, it may be more worthwhile to invest any excess capital each month in the stock market. It could help you to enjoy a more prosperous retirement.
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