Having no retirement savings at age 60 could become increasingly common over the coming years. Factors such as a high cost of living and disappointing interest rates on cash savings may mean many people struggle to build a retirement nest egg.
While buying FTSE 100 shares can mean a higher risk of loss compared to other mainstream assets, their long-term income return potential is high. Furthermore, by diversifying across a range of companies and sectors, it may be possible to reduce risk.
As such, now could be the right time to consider building a portfolio of FTSE 100 shares to obtain a passive income in older age. It could reduce your reliance on the State Pension.
Income potential
The FTSE 100 currently has a dividend yield that’s in excess of 4%. When large-cap shares are purchased in a tax-efficient account, such as a Stocks and Shares ISA, an investor can maximise their income so that shares offer significantly higher returns than other assets such as cash and bonds.
Moreover, it’s possible to build an income portfolio containing shares that offer a higher return than the FTSE 100. In fact, around a quarter of the index’s members currently offer dividend yields in excess of 5%. As such, an investor may be able to put together a portfolio of 25-30 shares that, on an aggregate basis, have a dividend return of over 5%.
Future prospects
The FTSE 100’s dividend yield suggests it currently offers good value for money, since it’s above its long-term average. Clearly, there are risks ahead for the global businesses listed on the UK’s main index. They face potential challenges such as a global trade war, weakness in the eurozone and political risks in the US. All of these factors could negatively impact on investor sentiment, and cause their valuations to come under pressure.
However, those risks also provide investors with the chance to obtain a relatively high income return at the present time. Through diversification, they may be able to reduce their overall risk to produce a smoother and more sustainable income return. For example, buying a wide range of companies that operate in a number of different sectors could reduce company and geographic risk. This may not remove the chances of paper losses entirely, but can provide an improved and more resilient passive income.
Building a portfolio
Clearly, starting to invest for retirement at an early stage is a good idea. However, the cost of living makes it difficult to save for older age.
It’s never too late to start seeking a passive income. With the FTSE 100 currently offering a relatively favourable income outlook, now could be a good time to start building an income portfolio that produces a robust passive income in the coming years.
