The State Pension age is set to rise to 67 over the next decade. Further rises would be unsurprising in the long run, since increasing life expectancy and an uncertain economic outlook could mean the political consensus focuses on reducing the cost of retirement benefits.
Alongside a rising State Pension age, the low level of payment to retirees means having a second income is highly important for most people. The State Pension currently amounts to just £8,767 per year, which is unlikely to provide financial freedom in older age.
As such, with the FTSE 100 offering a strong track record of growth, low valuations and an opportunity to diversify, now could be the right time to start building a retirement portfolio to help you beat the State Pension.
While having cash savings and investing in bonds may have been worthwhile in the past, low interest rates mean the FTSE 100 could offer significantly higher returns in the coming years. It has recorded an annualised total return of around 9% since its inception in 1984. With cash savings and bonds currently offering returns struggling to beat inflation in many cases, their potential to catalyse your retirement portfolio seems to be slim.
Of course, the FTSE 100 may experience periods of decline in the coming years. Risks such as Brexit, US political uncertainty, and geopolitical challenges in the Middle East may hold back investor sentiment and could produce paper losses for investors. But adopting a buy-and-hold strategy could lead to high returns, with the index’s track record showing it has always recovered from its lows to post new highs.
At present, the FTSE 100 appears to offer good value for money. It currently yields around 4.4%, which is above its long-term average. This suggests there’s a wide margin of safety on offer, and that the index may produce stronger total returns than it has done in the recent past.
Attractive valuations also suggest investors may be able to lower their overall risks, since many of the uncertainties facing the world economy appear to be priced in to FTSE 100 stocks’ valuations. This could mean the risk of losing money is relatively limited, since investors may already be expecting a difficult period in the near term that’s currently reflected in lower valuations across the FTSE 100.
With the UK facing a transitional period as it leaves the EU, diversifying across the global economy could be a good idea when it comes to building your retirement portfolio. The FTSE 100 currently generates around two-thirds of its income from outside the UK, which means investing in it could reduce your overall risk and enable you to benefit from strong growth rates in emerging economies. This could further improve your returns and help you to beat the State Pension and retire early.
The post 3 reasons why I’d buy FTSE 100 shares today to beat the State Pension and retire early appeared first on The Motley Fool UK.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020