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The new UK State Pension leaves a lot to be desired. Even if an individual earns the full weekly amount of £230.25 a week, this is still only £11,973 a year. That’s far below the £43,100 income that the Pensions & Lifetime Savings Association recommends for a comfortable retirement.
However, with the markets experiencing a new wave of volatility and uncertainty in recent weeks, fear of another crash is on the rise. Yet, despite appearances, that could prove to be a terrific opportunity for an investor to supercharge their retirement income and beat the State Pension by a wide margin. Here’s how.
Crashes create bargains
In the wake of the Covid-19 pandemic, stock markets crashed worldwide, with even the FTSE 100 — an index famous for its stability – dropping like a stone by over 30%. This panic resulted in many top-notch stocks being sold off despite their long-term trajectories remaining intact.
One example of this could arguably be Barclays (LSE:BARC). As one of the largest banks in Britain, the firm positioned itself to profit from coming interest rate hikes and an upward market correction post-crash. While the latter was rudely interrupted by another inflation-driven market correction in 2022, the bank once again bounced back.
As a result, any investor who used the chaos of March 2020 to snap up shares has gone on to reap a total gain of almost 240% in the last five years. On an annualised basis, that’s the equivalent of a 27.4% return!
At this rate, investing £500 a month for 13 years would build a portfolio worth just shy of £720,000. And by following the 4% withdrawal rule, that translates into a passive retirement income of £28,800 – more than double the current State Pension.
A few caveats to consider
Investing during a stock market crash is a proven strategy for achieving market-beating returns. But there are plenty of other businesses that haven’t fared as well as Barclays. Furthermore, maintaining a 27% annual return for over a decade is a pretty tough challenge, even for a high-quality business.
Looking again at the bank, management has several headwinds looming on the horizon that have the potential to slow its recent impressive momentum. Barclays is highly sensitive to the economic cycle as slower growth leads to lower demand for its lending services and higher default rates of its existing loans.
At the same time, a good chunk of its profitability is ultimately outside management’s control, with the Bank of England setting interest rates across the UK. With inflation slowly cooling, interest rate cuts are expected to follow. And while Barclays has a few tactics available to maintain its margins, in the long run, profitability’s likely to suffer (unless interest rates start rising again).
All of this is to say that Barclays may not offer the same 27% annualised gains during the next market crash. But there are other UK stocks out there that have this potential. By staying vigilant and focused on the long run when stocks inevitably fall sharply in the future, investors can unlock terrific returns, paving the way to beating the State Pension by a wide margin.
