Don’t “Save” for Retirement! I’d Invest $500 a Month in Shares for a $25,000 Passive Income

Saving money for retirement may lead to a disappointing nest egg due to low interest rates. Buying shares regularly could produce a larger passive income.

Building a nest egg large enough to produce a generous passive income in retirement is likely to be a key goal for many people.

Previously, it may have been possible to simply save money each month to achieve this aim. However, low interest rates over recent years, and especially after the 2020 market crash, mean that a cash savings account is unlikely to be helpful in building a retirement nest egg.

As such, now may be the right time to start buying shares on a regular basis. Even modest amounts invested in a diverse range of stocks could produce a generous income in older age.

Avoiding savings accounts

While having some cash on hand is always a good idea due to the potential for unforeseen circumstances, relying on savings to produce a retirement nest egg could lead to significant disappointment. They offer extremely low returns at the present time, as policymakers across the world have sought to stimulate the economy through a loose monetary policy.

In many cases, savings accounts may even struggle to keep up with inflation over the long run, as policymakers become more concerned about economic growth than a rising price level. As such, beyond having some emergency cash, avoiding savings accounts could be a sound means of improving the potential for a large retirement nest egg.

Making a passive income from shares

In place of savings accounts, a diverse portfolio of stocks could lead to a far more generous passive income. The stock market has a long track record of producing high single-digit returns that could provide growth to modest amounts of money invested on a regular basis.

Now may be an opportune moment to start investing in shares due to their low valuations. Many sectors have not yet fully recovered from the 2020 stock market crash. This could mean that they offer wide margins of safety that translate into high capital returns in the coming years. They may be able to catalyse a portfolio so that it produces a higher growth rate, and a larger nest egg, than investing in an index tracker fund that mirrors the performance of, for example, the FTSE 100 or S&P 500.

Building a $25,000 income

Even if an investor matches the performance of the wider stock market, they could invest a modest amount each month to produce a worthwhile passive income in retirement.

For example, assuming the same 8% annual total return managed by the stock market in recent decades, a $500 monthly investment could be worth $750,000 within 30 years. From this, a 3.5% annual withdrawal would produce an income of over $25,000. This could provide greater financial freedom and flexibility in retirement versus relying on cash. It could even allow an investor to retire earlier than would otherwise have been the case.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

ETF chart stocks
Investing

Here Are My 2 Favourite ETFs for 2025

These are the ETFs I'll be eyeballing in the New Year.

Read more »

money goes up and down in balance
Dividend Stocks

This 6% Dividend Stock Is My Top Pick for Immediate Income

This Canadian stock has resilient business model, solid dividend payment and growth history, and a well-protected yield of over 6%.

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Outlook for Cenovus Energy Stock in 2025

A large-cap energy stock and TSX30 winner is a screaming buy for its bright business outlook and visible growth potential.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Stock Market

CRA: Here’s the TFSA Contribution Limit for 2025

The TFSA is a tax-sheltered account that allows you to hold diversified asset classes at a low cost.

Read more »

Hourglass and stock price chart
Tech Stocks

1 Canadian Stock Ready to Surge Into 2025

There is a lot of uncertainty about the market in general as we move closer to the following year, but…

Read more »

think thought consider
Stock Market

Billionaires Are Selling Apple Stock and Picking up This TSX Stock Instead

Billionaires like Warren Buffett continue to trim stakes in Apple stock, with others picking up this long-term stock instead.

Read more »

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

canadian energy oil
Energy Stocks

Is Baytex Energy Stock a Good Buy?

Baytex just hit a 12-month low. Is the stock now oversold?

Read more »