It is the goal of many people to retire at a relatively young age and then live off the income from investments. For many retirees, shares form the backbone of their retirement portfolios. In the long run, they are expected to offer high returns and can offer above-inflation income opportunities in many cases. However, is the idea than an investor can retire and live off their shares simply unrealistic? Or, is it possible to own a diverse range of stocks and lead a comfortable retirement?
As mentioned, the returns on shares generally exceed the returns on all other mainstream assets in the long run. Holding assets such as cash, bonds and even property is likely to mean a lower terminal value than if the cash had been used to buy a diverse range of stocks. Therefore, in the long run it seems logical to invest an entire retirement portfolio in shares. After all, it is likely to lead to a higher valuation and potentially more spending power in the long run.
However, the main problem with shares is their volatility. At the present time, global stock markets are generally high. Therefore, investing in shares probably seems to be a sound idea to most people. The reality, though, is that a bear market will inevitably surface at some point in future. No stock market has ever risen in perpetuity, and so there will be a fall in the value of portfolios which are dominated by shares at some point in future.
Of course, the same could be said for most assets, but perhaps the difference with shares is that they are more volatile than other assets. For example, bond prices do not usually fluctuate to the same extent as share prices. Similarly, property valuations tend to move much more gradually than share prices, while the real value of cash is often only eroded gradually by inflation.
This high volatility can present problems to retirees - most of whom seek a reliable, stable and consistent income with which to enjoy their retirement. If the value of their portfolio is rising and falling dramatically, it may cause worry regarding its future valuation and the potential for a fall in income returns in the short run.
Due to the volatility of shares, it may be prudent for retirees to keep a portion of their portfolio in lower risk, less volatile assets such as short-term bonds. They may offer lower returns than shares, but they may also provide more stability and greater liquidity. This should ensure that a retiree has sufficient cash with which to survive in the short run in case share prices and dividends decline. And in the long run, they are still likely to benefit significantly from the capital growth and income return which shares have historically provided.
As such, the idea of living off shares in retirement is a realistic strategy to adopt. However, a consideration for short-term cash flow must also be factored in.
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Dream retirement destinations
Dream retirement destinations
A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.
You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.
And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.
In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.
If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.
This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.
For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.
However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.
Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.
Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.
Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.
However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.
As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).
You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.
The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.
Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.
The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.
It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.
There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.
France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.
Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.
It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.
Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.
Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.