What is the best way to build a passive income for your retirement?

One of the most important questions a person can ask themselves is: how should I prepare for my retirement? While the state pension offers a stable income past retirement age, it is understandable that many people wish to build a larger nest egg that will allow them to live a more comfortable lifestyle once they have finished working.

Sound financial planning is vital, yet many don’t make it the main focus until later in their lives. Data shows that more than a fifth of people in Britain do not have a private pension – if this applies to you, we strongly urge you to start your financial planning for retirement as soon as possible.

The best way to do this is to build a passive income stream to generate income and replace your salary. Doing so will provide the stability and security you need to enjoy your retirement. Here, we examine some of the main ways you can do this and assess which ones are the most suitable passive income streams to prepare you for a comfortable retirement.

Stocks and shares

Arguably the most well-known way to build a passive income is to invest in stocks and shares. It comes with some advantages, such as the relatively low entry point and the fact that it is now easier than ever to invest in this way.

However, there are also notable downsides to investing in stocks and shares vs. investing in property. While the potential rewards from stocks and shares can be impressive, the risks are also comparatively high when compared to property investment.

Their reliability can also be called into question. Unlike the property market – which has proven its ability to weather storms in recent years – investing in stocks and shares is more volatile. The future is much harder to predict with stocks and shares, with the sector vulnerable to factors outside your control.

If you are looking to build a passive income for retirement, stability and predictability should be near the top of your list of priorities, and it is uncertain whether stocks and shares can provide that.

Find out more about how stocks and shares compare to property investment by clicking here.

Saving with a bank

Saving with a bank to generate passive income for your retirement is a tried and tested method that is understood by everyone – but will it generate a suitable income to secure a comfortable retirement?

Saving with a bank is notably low risk. The Financial Services Compensation Scheme guarantees up to £85,000 of your savings will be protected in the event of a bank going under. This offers a level of predictability to your saving.

However, this does not mean it is risk-free. The biggest danger is that the rates offered are unlikely to ever outpace, or even keep up with, inflation. This means that while your money won’t go anywhere, you will be falling further behind and effectively losing money compared to the cost of living at all times.

The Bank of England has retained the base rate of interest at 0.1%, and even the best savings accounts do not offer much more interest than that. Meanwhile, the Office for National Statistics announced this month that inflation, or the Consumer Price Index, is at 4.2%.

Altogether, this makes saving with a bank a poor option if your goal is to generate passive income for your retirement. Safety is one thing, but can a savings account really be classed as a low-risk option if it leaves you without enough income to live comfortably? Choosing a savings account is simply moving the risk onto your day-to-day life rather than eliminating it entirely.

Find out more about how saving in a bank compares to property investment by clicking here.

Buy to let property investment

In contrast, investing in property offers the best of both worlds. The market has proven its strength, persisting in the face of volatility, and its underlying foundations mean that it is not as susceptible to outside forces as stocks as shares. Likewise, when compared to a savings account, investing in property to fund your retirement offers a comparable level of safety with a hugely more impressive rate of return.

The housing charity Shelter estimates that we need to build at least 3 million new homes in the UK over the next 20 years to meet demand as it exists now – a figure which will only increase as the UK’s population does in the future. In reality, the latest UK government figures show that only just over 240,000 new homes are being built per year at the current pace, and that will not be sufficient.

This shortfall in available homes is fuelling competition and pushing house prices up on a monthly and annual basis at a pace that has rarely been seen before. Data from the Land Registry shows that property values have increased by almost 12% in the year to date. Furthermore, because there is no prospect of the pace of housebuilding being accelerated to the necessary levels, this situation will continue into the future and lead to an additional 21.7% house price growth by 2026, according to JLL.

However, for the purposes of building a regular, passive income for your retirement, what is most interesting is how this affects the rental market. Monthly rental income is your dependable, predictable income stream that will allow you to live comfortably in your retirement years. Luckily, the aforementioned shortage of new homes is good news on this front too.

Rents in the UK are rising at their fastest ever pace right now, according to Zoopla. Competition for the best homes pushed up rents 6% in the last quarter alone. The rental market is exceeding pre-pandemic records and reaching new heights on a monthly basis. The lack of supply and the massive demand ensures that the rental market will remain healthy and continue to grow for years to come – making it the perfect choice to provide you with a passive income in retirement.

The outlook for rental growth in the UK is so good that the latest forecasts from Savills have actually been upgraded recently to reflect the growth of demand and lack of supply. The company predicts average rental growth of 19.9% by 2026 on top of the gains already made in 2021 – and areas with rapidly growing populations like Manchester, Birmingham and the London Commuter Belt are expected to see rental growth even more impressive than that.

Investing in property is the perfect way to develop a passive income stream to fund your retirement, and the team at Opulent are ready and waiting to assist with a comprehensive plan which meets your specific needs. Get in touch today by clicking here and start securing your future.

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