Although the State Pension provides an income in retirement, it is unlikely to provide financial freedom in isolation. After all, it amounts to just £8,767 per year, which is around a third of the average salary in the UK.
As such, investing for retirement may be a requirement for many people. It could enable them to build a portfolio which provides a passive income. While this may not be an easy task, buying FTSE 100 shares could be a good place to start, with the index appearing to offer good value for money at the present time.
Clearly, different people will require different amounts of income in retirement. Therefore, the size of their required nest eggs from which a passive income will be derived are likely to vary to a significant degree.
For example, a £250,000 portfolio could provide a passive income of around £10,000 per annum when invested in the FTSE 100. The index currently yields around 4%, which is generally viewed as being a sustainable withdrawal rate for a retiree. It should allow their portfolio to enjoy capital growth and sustain their spending levels in older age.
A £250,000 portfolio may seem to be unobtainable to many people. However, by investing in the FTSE 100 it could be much more achievable than it first appears. After all, the index has a solid track record of growth, with it having delivered an annualised total return of around 8% since inception. Assuming the same rate of growth, it may be possible to build a £250,000 portfolio by investing around £180 per month in a diverse range of FTSE 100 shares over a 30-year period.
Although the rate of return in future may not be the same as in the past, the FTSE 100 appears to offer good value for money at the present time. The world economy faces a period of uncertainty which appears to have induced a degree of caution among investors. This could mean that many large-cap shares now trade on low valuations, and that they may offer wide margins of safety which enhance their long-term growth prospects.
Furthermore, the high dividend yields which are available on a variety of FTSE 100 companies mean that investors may not require significant levels of capital growth to meet their 8% annualised total return target. As such, focusing on the sustainability of a dividend, as well as its future growth prospects, may be a sound move.
Now could be the right time to invest in large-cap shares in order to build a retirement nest egg. While a £250,000 portfolio may or may not be sufficient for a particular investor, it serves as an example that a surprisingly large portfolio can be obtained by modest investments in the FTSE 100 over the long run. By focusing on this strategy, it may be possible to reduce your reliance on the State Pension in older age.
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.