While Cash ISAs may be popular, they are unlikely to improve your retirement prospects. The main reason for this is their low interest rate, which is unlikely to be above 1.5% at the present time.
Furthermore, interest rates are expected to stay at relatively low levels over the coming years. This could mean that Cash ISAs fail to provide a real-terms return on your capital.
As such, now could be the right time to consider investing in a range of FTSE 100 shares. They offer long-term growth potential, as well as a significantly higher income return than a Cash ISA.
In addition, it is possible to diversify across a range of FTSE 100 stocks to reduce risk. And while a Cash ISA may not offer high returns, having some cash savings could be a worthwhile move in case of emergency.
Stock market investing
Investing in the stock market may conjure up images of gambling or losing money for many people. While there is always a risk of loss from investing in any company, over the long run the FTSE 100 and FTSE 250 have delivered high-single-digit returns each year. For example, the FTSE 250 has returned over 9% per annum in the last 20 years, despite facing risks such as the financial crisis and Brexit.
Therefore, anyone who has a long-term view may benefit from the growth potential offered by shares. Having a sufficient amount of time for them to recover from any downturn is key, which they have always been able to achieve. And with the prospects for the world economy being bright over the long run, now could be a good time to invest in growth shares to boost your retirement nest egg’s growth rate.
As well as offering the chance to build a retirement portfolio through shares, the stock market also offers a favourable income outlook. For example, the FTSE 100 currently yields over 4%, while the FTSE 250 has a yield of over 3%. Both of these figures are more than double the interest rates that are currently available on Cash ISAs. This means that, while their income may not be guaranteed as is the case with a Cash ISA, shares can provide a more generous passive income in retirement.
Through diversifying across a range of stocks, it is possible to reduce risk and create a more robust passive income in older age. Having some cash is, of course, a good idea. Unexpected bills and peace of mind mean that a part of your assets should always be held in cash. However, focusing a portion of your retirement fund on the stock market may lead to higher returns while you are building it, as well as a more attractive income when you wish to obtain a passive income in older age.
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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.