With the State Pension age set to rise to 67 within the next decade, the payout’s lifetime value is declining. Moreover, even though it could offer strong annual growth, its current level of £8,767 per annum is unlikely to meet the financial needs of most retirees.
Therefore, it could be a good idea to build a retirement nest egg using FTSE 100 shares. At the present time, many FTSE 100 members offer high income returns, strong growth prospects and low valuations. As such, they could help you to generate a passive income in older age.
Of course, the stock market currently faces an uncertain period. This is unlikely to abate in 2020, with political risks in the US, Europe and Asia expected to continue over the coming months. Therefore, investors in the FTSE 100 may experience a period of volatility that leads to paper losses at times.
However, such periods have historically been favourable times to buy high-quality businesses. They are more likely to survive whatever economic threats they face, and could even grab market share at the expense of less financially sound rivals. And with many stocks currently trading on low valuations, they could offer wide margins of safety that lead to favourable risk/reward ratios for investors.
Despite investor sentiment being weak at the present time, the outlook for the world economy remains bright. It is expected to grow at a faster pace in 2020 than it has done in 2019, while major economies such as China and India are expected to deliver strong growth over the coming years. This could catalyse the financial performances of FTSE 100 stocks and allow them to reward shareholders through rising dividends.
Over time, their returns could amount to a sizeable nest egg once compounding has had an impact on your portfolio. Since the FTSE 100 currently yields 4.5%, and it is possible to obtain an even higher yield from many of its members, it may be able to offer a rising passive income in older age.
Therefore, now could be the right time to invest for your retirement. The returns on other assets, such as cash and bonds, are significantly lower than FTSE 100 shares. This may mean that they do not improve your retirement prospects, and could even fail to keep up with inflation over the medium term.
By obtaining a diverse range of FTSE 100 shares, you can reduce overall risk. This may lessen the impact of a potentially volatile period in 2020 and buying during such a time has proven to be a successful strategy in the past. It could improve your retirement prospects and help to increase the size of your portfolio in the long run so that it can offer a higher passive income in older age.
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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 2019