If the idea of living off £8,767 per year in retirement does not sound appealing, investing in FTSE 100 shares could be a worthwhile idea. After all, the State Pension age is set to rise, while the FTSE 100 has a solid track record of delivering impressive total returns.
OK, there are risks facing the index at the present time. Brexit, a weak European economy and a global trade war could hold the index back to some degree. But for investors with a long-term timeframe, now could be the right time to capitalise on the low valuations of large-cap shares.
While history is not a perfect guide to the future performance of the index, the FTSE 100’s track record suggests that it can deliver a high-single-digit return annually over the long run. It started life in 1984 at 1,000 points and today trades at over 7,200 points. When dividends are factored in, this means that an annualised total return of 7% could be realistic over the long run.
When the impact of compounding is factored in, even a modest investment in FTSE 100 shares over the long run could enable you to double your State Pension. For example, investing £50 a week would lead to a portfolio value of £245,000 over a 30-year timeframe when the annual returns are 7%. Assuming a 4% dividend yield, it could produce a passive income of £9,823 per year in retirement. That’s more than the current State Pension gives you.
The returns available from the FTSE 100 could be even higher in the coming years than they have been in the past. The index contains a number of stocks that offer low valuations and buoyant growth prospects at the present time. This suggests that there may be an opportunity to buy high-quality businesses while they offer wide margins of safety, which could enhance your returns in the long run and even help you to retire early.
Yes, short-term risks exist. The stimulus package recently announced by the ECB suggests that the European economy continues to falter a decade after the financial crisis, while the global trade war could intensify depending on the outcome of talks between the US and China. These risks, plus Brexit, could lead to a period of uncertainty for the FTSE 100.
However, history shows that buying stocks during periods where major risks are present can produce higher returns in the long run. In many cases, investors have priced in the uncertain outlook for the wider economy. This means that their risk/reward ratios are more appealing than they otherwise would be.
As such, now could be the right time to invest for your retirement. With the State Pension being inadequate and the age at which it starts being paid set to rise, the FTSE 100 could offer the opportunity to obtain financial freedom in older age.
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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.