Since the State Pension is unlikely to be sufficient to provide financial freedom for most retirees, generating a second income is becoming increasingly important.
While this may naturally mean that many people target cash savings or bonds as a means of obtaining an income, FTSE 100 dividend shares could offer a more appealing income outlook.
Furthermore, investing in shares that offer wide margins of safety, as well as those with a diverse exposure to the world economy, could help investors to beat the State Pension.
With cash savings offering a return that is below inflation, and fixed-income options having the potential to be negatively impacted by rising interest rates, FTSE 100 dividend shares could be a worthwhile option for many retirees.
Certainly, there is a risk of capital loss. But for individuals who are not looking to sell, this may not be a major problem. As long as an income continues to be generated, and that income rises by at least as much as inflation each year, the volatility of a portfolio’s valuation may be relatively unimportant to many retirees.
With the FTSE 100 currently yielding around 4.5%, it is possible to treble the returns on cash savings. Overt the long run, this can have a significant impact upon an individual’s standard of living in older age.
Value for money
With there having been a decade-long bull market, a number of shares could be overpriced at the present time. Investor sentiment has generally been buoyant since the turn of the year, which could make it more difficult to find companies that offer wide margins of safety.
However, there are still a number of mid- and large-cap shares that trade below their intrinsic value. They could be the stocks to focus on, since they may offer reduced risk and better return potential than the wider market.
Although in some cases the companies in question may prove to be value traps, by assessing their strategies and growth plans, it may be possible to find undervalued shares that could produce impressive returns in the long run.
With there being a number of risks facing the world economy, from challenges such as Brexit and the US-China trade war, investors may wish to obtain a significant amount of diversification.
An easy means to achieve this goal is to utilise the regular investing services that are offered by a variety of share-dealing providers. They reduce commission costs to as little as £1.50 per trade, which could make them appealing to smaller investors. Likewise, tracker funds may provide exposure to an index, with company-specific risk being reduced as a result.
Through buying a range of companies, it may be possible to generate smoother and less volatile returns that produce a more reliable income in older age. This could make investing a more realistic alternative to relying on the State Pension in retirement.
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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.