The State Pension is relatively low compared to the UK’s average salary. In fact, it amounts to around a third of the median annual salary, which suggests that it may not provide a sufficient amount on which to live comfortably in retirement.
While this may understandably cause a degree of concern for many people, investing in FTSE 100 shares could be a solution.
Certainly, the FTSE 100 has a track record of volatility. But it also offers a relatively high income return as well as the potential to generate capital growth.
As such, buying a diverse range of large-cap shares could prove to be a sound means to overcome a relatively disappointing State Pension.
While the current State Pension of £8,767 may be relatively low, it could become even less appealing in the coming years. The State Pension age is due to rise to 68 in the next two decades, and further increases would be unsurprising. Rising life expectancy and an ageing population may mean that the political consensus becomes less positive towards the State Pension due to its increasing cost for the working population.
Therefore, obtaining a second income in retirement could become increasingly important for a wide range of people. With interest rates expected to remain low, the income returns on assets such as cash and bonds may be relatively limited. And with recent tax changes expected to reduce the net returns available on property investments, buying a range of FTSE 100 stocks could become an increasingly appealing option.
With it being possible to obtain an income return in excess of 5% from a variety of FTSE 100 shares, it may be relatively straightforward to build a diverse portfolio of companies that generates a second income into retirement. Since the index is internationally-focused, the dividend growth opportunities on offer from exposure to fast-growing economies may mean that you can obtain an income that grows at a faster pace than inflation over the long run.
Of course, there are no guarantees that any FTSE 100 company will continue to pay rising dividends. They could experience challenging trading conditions, for example, which limits their ability to reward shareholders. Furthermore, their share prices could become increasingly volatile if the prospect of a global trade war becomes increasingly real.
However, the index has a strong track record of capital growth. Although it may experience downturns for short periods, in the long run it has generally produced annualised total returns of around 7%. As such, investors who are able to hold on to high-quality stocks throughout the booms and busts that will take place in future could enjoy capital growth, as well as a rising income.
With the index presently trading below its record high, now could be a good time to buy a range of stocks that offer well-covered dividends which have the capacity to grow at a faster pace than inflation.
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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.