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

The FTSE 100 (INDEXFTSE:UKX) could offer capital growth and dividend returns in order to boost your passive income in retirement.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »