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Retirement savings: forget a Cash ISA, I’d buy dirt-cheap FTSE 100 stocks instead

While the past is never a perfect guide to the future, the track record of cash and shares suggests that the latter is a much better place to invest your capital in order to retire early.

That’s especially the case at the present time, with interest rates being close to their historic lows and the FTSE 100 appearing to offer a wide margin of safety.

As such, there may never have been a better time to build a portfolio of large-cap shares. Pivoting from a Cash ISA to the stock market today could boost your retirement prospects through generating a larger nest egg.

Return prospects

At the present time, the outlook for UK interest rates remains relatively dovish. This means that the Bank of England is expected to only increase interest rates at a modest pace over the next few years, with concerns about the domestic economy and the global economy potentially causing them to adopt a cautious attitude.

This could mean that while Cash ISAs are a relatively popular product, they offer negative real-terms returns. Over the long run, this may mean that savings are unable to provide a passive income that can fund a lifestyle in retirement at a time when the State Pension age is expected to move higher.

By contrast, the FTSE 100’s return potential seems to be high at the present time. Its yield is more than twice that of the S&P 500, which indicates that the UK index could move much higher without being overvalued on a relative basis. And, with the FTSE 100 having recorded high-single-digit annualised total returns since its inception in 1984, its track record shows that it has the potential to build a large retirement fund for a range of investors.

Short-term challenges

The FTSE 100’s price level could be negatively impacted by a variety of risks in the short run. Among them are Brexit and a global trade war. While they may cause paper losses to be recorded for investors in large-cap shares, this is unlikely to be a problem if their time horizons are sufficiently long enough to allow a period of recovery. After all, the index has always posted higher highs following its bear markets.

This is in stark contrast to the returns that are available on a Cash ISA. Savers know that their cash holdings are set to deliver a negative real-terms return, which makes them an illogical place to invest excess cash.

Since inflation may remain higher than interest rates over the coming years, the difference in valuation between a FTSE 100 portfolio and a Cash ISA could widen by a surprisingly large amount. Therefore, with the index seeming to offer good value for money due to the risks faced by the world economy, now could be the right time to buy a range of large-cap shares.

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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.