In the past the retirement age was 65 (and 60 for women), but it is set to rise to 67 over the next decade. As such, an early retirement may feel like an increasingly distant dream for many workers.
However, by investing in the FTSE 100, it is possible to build a large nest egg from which to enjoy a growing passive income in older age. The index appears to offer good value for money at the present time, and could deliver high returns that boost your financial prospects.
With tax-efficient accounts such as a Stocks and Shares ISA being cost-effective and simple to set up, now could be the right time to start planning for your early retirement.
The FTSE 100’s price level may only be around 5% higher than it was 20 years ago, but its performance since inception in 1984 has been strong. It has delivered a total return of around 9% per annum over the 36-year period. When compounded, this can lead to significant returns that turn even modest sums of capital into a surprisingly large nest egg.
For example, someone aged 40 who invests £200 per month in the FTSE 100 could have a nest egg of over £200,000 by the time they reach 65 years old. From this, an income of over £8,500 could be generated from the FTSE 100 since it has a dividend yield of 4.3% at the present time.
Clearly, investing a larger amount or holding shares over a longer time period could lead to a larger nest egg. Therefore, it may be a good idea to start planning for retirement as soon as possible to allow the FTSE 100’s returns to compound.
As mentioned, the FTSE 100 seems to offer a number of sound investment opportunities at the present time. Despite a strong performance in 2019, many of the index’s members trade on lower valuations than their historic averages. This may mean that they offer discounts to their intrinsic values – especially since the prospects for the UK and global economies are relatively sound. This could equate to higher returns in the coming years than have been recorded in the recent past.
Investing in the FTSE 100 is relatively simple and cost-effective. Accounts such as a Stocks and Shares ISA can help to reduce your tax bill in the long run, and yet the cost of managing them is minimal. This means they are highly accessible to a wide range of investors. And regular investing features allow smaller investors to start building a retirement portfolio without commission charges severely reducing their overall returns.
Therefore, with the State Pension age set to rise in the coming years, now could be the right time to start building a nest egg. The FTSE 100 appears to offer a sound means of doing so, with a number of its members offering impressive long-term growth outlooks.
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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