With the State Pension amounting to just £8,767 per year, it is unlikely to be sufficient to provide financial freedom for most people in older age. In many cases, it may fail to cover basic necessities such as household bills. Therefore, obtaining a passive income in retirement from a portfolio of investments could prove to be crucial for many people.
At the present time, the returns on cash, bonds and property may prove to be disappointing on a net basis. Therefore, the most appealing opportunity for investors to generate growth and/or income may be the FTSE 100. Following its recent volatility, there appear to be a number of buying opportunities that could enhance your retirement prospects.
Relative appeal
Although the State Pension could rise at a relatively brisk pace over the coming years, its current low level means that a second income is likely to be required in older age.
Given the fact that interest rates are close to historic lows, the returns on cash and bonds are below inflation in many cases. For example, the best savings accounts offer interest rates of around 1.5%, while many investment-grade bonds have seen their prices pushed higher by a loose monetary policy. As such, their appeal from a risk/reward standpoint may be limited.
Likewise, an increasing tax burden on buy-to-let investors is making property less appealing. It is more challenging to obtain a generous net yield on bricks-and-mortar, while rising house prices over the last decade mean that the scope for capital growth may be limited.
FTSE 100 potential
By contrast, the FTSE 100 currently offers a dividend yield of 4.5%. An investor may be able to obtain an even higher yield if they focus their capital on high-income stocks, while the availability of products such as Stocks and Shares ISAs means that the net return may be the same as the gross return for many investors.
As well as income potential, the FTSE 100 has growth opportunities. Many of its stocks appear to be undervalued, with their low price-to-earnings (P/E) ratios, high yields and improving financial outlooks suggesting that they could become increasingly popular among investors over the coming years.
Since the index has only moved modestly higher over the last two decades, there could be wide margins of safety included in a number of its members’ valuations. As a cyclical investment class, shares are unlikely to remain subdued in terms of their performance over the long run. This indicates that there could be strong gains ahead, with the low valuation of the index indicating that it may not yet have reached its peak in the current cycle despite experiencing a decade-long bull market.
Therefore, now could be a good time to buy a diverse range of large-cap shares. They could help you to overcome the inadequate State Pension over the long run.
