Should I save money or invest for retirement using the FTSE 100?

The FTSE 100 index is home to some great businesses that can help propel me to a happy financial retirement. Here’s how.

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According to Scottish Widows in its annual retirement report, the UK has seen “stagnant” real wage growth for 14 years. And that situation has been affecting people’s ability to save for retirement. But I’m aiming for a happy financial retirement with the help of the many great businesses in the UK’s leading FTSE 100 index. 

Prioritising pension contributions

All the trouble with wage growth started in the aftermath of the financial crisis in 2008. And Scottish Widows estimates earned personal incomes would be 28% higher now had the rising trend before the crisis continued.

And the current spike in the cost of living is making the situation even worse. The firm’s recent survey showed that many people have been cutting back on saving. And some are resorting to drawing from their short-term savings to cope. But a minority are taking even more drastic action. Around 11% of people said they’ve reduced the amount of saving they’ve been doing for their pensions.

But I think it would be financially risky for me to reduce my contributions to my retirement fund. By doing so, I could end up living an austere live in my golden years because of a shortage of income. So, for me, it’s important to prioritise and maintain my pension saving now. And that’s even if I need to lower my lifestyle expectations for the time being. 

Investing rather than saving

However, saving for a pension doesn’t mean stuffing money into bank accounts beyond my short-term savings. For me, the long-term performance record of the stock market is attractive. For example, London’s lead FTSE 100 index started at the level of 1,000 in 1984. And as I write on 29 June, it stands near 7,286.

But share price performance is only part of the returns available from the stock market. A big part of the gains can arrive in the form of shareholder dividends. 

For example, one of the bastions of strength in my portfolio right now is an index tracker fund that follows the fortunes of the Footsie. And one of the reasons for that is the way the fund accumulates the regular dividends then rolls them back into my investment automatically. 

And compounding dividends along the way would have produced an even more impressive return from the index since 1984. However, it’s worth me remembering that past performance is not a reliable guide to the future. And it’s possible for my investments to underperform from where they are now.

Aiming for higher returns

Nevertheless, in addition to my FTSE 100 investment, I’m aiming for higher returns by investing in some of the great businesses within the index. My tracker will match the market. But some individual company shares have the potential to beat the performance of the general market. That said, positive performance is never guaranteed, of course, because all shares carry risks as well as positive potential.

However, despite the uncertainties, I think the biggest risk of all comes from not investing for retirement. So, I’m planning to keep up my regular retirement investments through thick and thin.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold 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.

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