Don’t ‘save’ for retirement! I’d invest in dirt-cheap UK shares instead

After the stock market caused a spectacular tantrum in 2022, cheap UK stocks seem to be everywhere, especially in FTSE 250.

A common piece of financial advice is to save money for retirement. But with low interest rates for more than a decade, savings accounts have yet to provide spectacular returns. The fact is that even after the recent increase in interest rates, the average interest rate offered by UK savings accounts is still at 0.85%.

Of course, compared to the FTSE 250’s 20% decline last year, that’s to be expected. And it perfectly demonstrates the power of keeping money in the bank against the stock market during economic turmoil.

However, when zoomed out over several decades, keeping all your money in the bank may not be such a good idea. Why? Because despite the stock market correction of 2022, the ‘Covid-Crash’ of 2020, the financial crisis of 2008, and the dotcom bubble of 2000, the FTSE 250 index has still returned an average of 10.6% since its inception in 1992.

Over the long term, investing intelligently in UK shares is a proven way to build substantial wealth. And, historically, the stock market has produced its best performance after a crash or correction. In other words, investors now have a rare opportunity to capitalize on some fantastic buying opportunities.

What are the best UK stocks to buy today?

But not every beaten-down business is a bargain. In fact, many companies have been sold for good reasons. Therefore, investors buying only the cheapest stocks they can find will destroy wealth rather than create it.

Instead, the focus should be on finding quality companies that experience only short-term disruptions. If the balance sheet is full of debt, and there is not enough capital to meet short-term obligations, it is probably a good idea to go in the opposite direction. In addition, a falling stock price may apply if the business model has been compromised and cash flow is disrupted.

On the other hand, if the financial health of the business remains intact and growth is only slow due to economic problems, then it may be worth further investigation.

Eliminating weak overleveraged businesses is only the first step on the path of critical inquiry. However, this filter can quickly remove UK stocks that may be poor investments from consideration.

Create a retirement fund

As mentioned earlier, the FTSE 250 has returned an average annual return of 10.6%. And by capitalizing on depressed valuations today, investors can lock in similar or better returns.

Even with just an 11% return, investing £500 a month for 30 years would yield a portfolio worth £1.4m. And under the 4% withdrawal rule, that’s enough to generate an annual passive income of £56,000 – not bad.

However, it is important to remember that investing in British stocks is far from risky. There is no guarantee of positive returns, especially when picking individual stocks. In fact, a well-constructed portfolio can reduce your retirement savings.

That’s the main benefit of a savings account. In the absence of a bank, retirement savings are safe. And even then, up to £85,000 is covered by the FSCS. However, given the potential rewards, investing in the stock market is a risk worth taking, in my opinion.