I’d invest $25 a week in cheap shares for a passive income in retirement

Investing money regularly in cheap shares could produce a generous passive income in older age. The stock market crash has caused many high-quality companies to trade at prices that are substantially below their long-term averages. Buying and holding them over the long run may produce impressive returns that create a worthwhile nest egg for retirement.

Certainly, there are risks facing the stock market in the short run. However, through buying a diverse range of companies and allowing them the time they need to grow, an investor may experience a greater amount of financial freedom in older age.

Buying cheap shares for a passive income

The stock market crash means there is the potential to obtain attractive capital growth from today’s cheap shares that could ultimately provide a passive income in retirement. For example, some stocks face the prospect of difficult operating conditions in 2021. Risks such as Brexit and a weak global economic outlook may hinder their capacity to generate growing profit. However, their financial strength and competitive advantages may mean that they have the potential to recover in the coming years. In doing so, they may help an investor to build a large nest egg for retirement.

Of course, not all cheap shares will deliver impressive returns in the coming years. As such, it is crucial for any investor to understand the businesses they are purchasing. For example, companies with low debt, an economic moat and a sound strategy to deliver growth may be better able to produce rising share prices over the coming years. This may mean they make a bigger contribution to the size of an investor’s nest egg, thereby offering the prospect of a larger passive income in older age.

Investing money on a regular basis

Investors who do not have a lump sum to invest today can make regular purchases of cheap shares to build a nest egg that offers a passive income in retirement. Indeed, even modest amounts of money invested regularly in undervalued stocks can add up to a surprisingly large portfolio over the long run.

For example, the stock market has historically delivered an 8% annual total return. Investing $25 per week at that rate of return could produce a portfolio valued at $380,000 over a 40-year working life. From that, a 4% annual withdrawal would equate to an income of over $15,000.

Clearly, a larger passive income could be achieved by investing a greater amount on a regular basis. Meanwhile, many investors may have a shorter investment horizon than 40 years. However, the example shows that even achieving the market rate of return on a regular investment can lead to a worthwhile retirement income. And, through buying cheap shares after a market crash, an investor could beat the market and build an even larger portfolio by the time they retire.

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• 5 ASX dividend shares to buy for income in 2021
• 3 ASX growth shares to add to your portfolio in 2021

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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