While planning for retirement may not be at the top of most people’s list of priorities, doing so could make a real difference to their quality of life in older age. Of course, other considerations often get in the way in the short run, but investing even a modest sum of money each month in the FTSE 100 could have a positive impact on retirement plans.
With the State Pension age set to continue rising for men and women over the long run, it may become increasingly difficult to retire before 70 years of age. As such, taking action now through buying FTSE 100 shares could be a worthwhile move.
For many people, the idea of buying shares is off-putting because of the amount of capital they feel is required. While in previous decades it didn’t always make financial sense for an individual to invest small sums of money due to minimum commission costs, today even small sums of money can be used to build a portfolio. The costs of buying and selling shares have fallen, while direct debits and automatic investment tools mean that it’s simpler than ever to invest on a regular basis.
For example, an individual may decide they will invest £50 per month in the stock market. That may sound like an amount unlikely to have a significant impact on their retirement plans. However, using aggregated orders so commission costs are minimal could mean their overall returns are surprisingly high. That’s especially the case if they use tax-efficient accounts such as a SIPP or a Stocks and Shares ISA, while a Lifetime ISA could offer a bonus of up to £150 per year, if £50 is invested per month.
Since the FTSE 100 has a track record of delivering annualised total returns of around 7%, investing £50 per month could lead to a surprisingly large nest egg in the long run. In fact, over a 30-year time period, it equates to a portfolio value of £57,000. Assuming an individual spends only the dividends they receive in retirement, this could increase their State Pension by over 25% per year.
Investing larger amounts or over a longer time period could lead to an even higher level of income in retirement, which is why it makes sense to start as soon as possible.
While many investors may wish to try and time the stock market, in terms of buying low and selling high, the reality is that investing small sums regularly may be a more effective method of building a retirement portfolio. The index is, after all, difficult to accurately predict over the short run, while it has always risen to record highs over the long run. As such, for investors who seek a higher return than that offered by the FTSE 100, selectively buying high-quality shares at fair prices may be a better idea.
Either way, investing modest sums in a tax-efficient manner on a regular basis could make a real difference to the retirement prospects of a large number of people. With the State Pension age set to rise, starting now could be a shrewd move.
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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.