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Retirement savings: how you can make a passive income by investing in FTSE 100 shares

Generating a passive income to supplement your State Pension in retirement may seem to be an impossible task at times. After all, the cost of renting or buying a house has risen significantly in recent years, while wage growth has been lacklustre for many people.

However, the FTSE 100 offers the chance to build a retirement portfolio from which you can obtain a passive income. The index could even provide an income return in older age, with it having a strong track record of dividend growth.

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Furthermore, investing even modest sums of money for the long term can lead to a surprisingly large nest egg. Following the FTSE 100’s recent pullback, now could be a good time to start investing for your retirement.

Growth potential

Since the FTSE 100 is a global index, in terms of it generating the majority of its revenue from outside the UK, it could benefit from the strong growth outlook for emerging economies such as India and China. In fact, both countries are expected to grow at a rapid rate relative to other major economies over the next few decades, with rising wages and increasing wealth providing growth opportunities for a variety of FTSE 100 companies.

Therefore, investors who have a long-term view may be able to benefit from buying a diverse range of FTSE 100 shares. In many cases, companies with encouraging growth outlooks may not offer the lowest valuations in the index. But on a risk/reward basis, they may be the most attractive. Furthermore, they could have the biggest impact on your retirement nest egg.

High returns

Since the FTSE 100 has risen seven-fold from its starting price at inception in 1984, it has a long history of growth. In fact, on a total return basis, it has delivered an annualised return of around 8% over the last 35 years. Assuming a similar rate of growth is achievable in future, investing even modest sums of money over the long run could lead to a surprisingly large nest egg and passive income in retirement.

For example, investing £5 per day at an annualised return of 8% over a 30-year time period would lead to a portfolio valued at around £206,000. From this, a 4% income return of over £8,000 would be achievable. This could nearly match the State Pension, and provide greater financial freedom in retirement.

Income prospects

Since the FTSE 100 currently has a dividend yield of over 4%, it could also be a means of obtaining a passive income in retirement. Certainly, there are less volatile investments available elsewhere that may be more suitable for some investors. But the index’s strong track record of dividend growth and the high yields that many of its members offer suggest that the FTSE 100 has long-term income investing potential alongside its growth prospects.

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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.