The State Pension age is set to rise to 68 over the next 20 years. However, it would be surprising for it to remain at 68 in perpetuity, since a rising life expectancy and an ageing population means that the political consensus could move towards an age that ends up being 70 or over.
As such, building a nest egg that can provide a passive income in retirement could become increasingly important – especially for people currently of working age who may not be able to access the State Pension until they are in their late 60s.
FTSE 100 appeal
The FTSE 100 could be an attractive means of building a portfolio during your working life, as well as offering an income in older age. In terms of its capital growth potential, the index has strong credentials based on its track record. Since its inception in 1984, it has delivered an annualised capital return of almost 6%. When dividends are added to this figure, a total annualised return that is in the high single-digits over the long run seems to be very realistic.
At the present time, of course, the FTSE 100 faces a period of uncertainty which could produce volatile share prices in the coming months. Although Brexit may be dominating news headlines in the UK, fears surrounding the US/China trade war could have a much greater impact on the index’s performance. And with that situation being highly changeable, investors may price in potential risks and slower growth across the index.
This could provide a buying opportunity for long-term investors. With the index currently yielding above 4%, it seems to offer good value for money and may be able to offer stronger capital growth than it has in the recent past.
The FTSE 100’s income appeal is relatively high at the present time. However, its dividend growth prospects mean that it could deliver an income return that is in excess of inflation over the long run, while large-cap dividend shares could become increasingly appealing to investors due to persistently low interest rates.
As such, buying FTSE 100 dividend stocks could prove to be a shrewd move. At the present time it is possible to obtain a 5%+ portfolio yield from a diverse range of large-cap shares. Not only could they deliver capital growth that helps you to build a nest egg prior to retirement, they may offer a high and sustainable income return in older age that stays ahead of inflation.
This could mean you are increasingly less reliant on the State Pension, which is likely to be a good thing as the age at which it starts being paid looks set to rise to 68 and beyond over the coming decades. Furthermore, with the State Pension amounting to less than a third of the average UK salary, having a second income in older age could become a requirement for many retirees.
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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.