Relying on the State Pension in retirement may not provide financial freedom in older age. After all, it amounts to just £8,767 per year, which is around two-thirds less than the average UK salary.
As such, building a retirement portfolio from FTSE 100 shares could be a shrewd move. It has the potential to deliver annual growth that is above many other mainstream assets, while the index appears to offer good value for money at the present time.
Therefore, now could be the right time to buy these two large-cap shares. They have the potential to deliver improving financial performances that could help you to retire early.
The recent third-quarter update from RBS (LSE: RBS) highlighted that the challenges it has faced over the last decade have not yet fully subsided. For example, it recorded a £900m provision for PPI claims. This contributed to an operating loss of £8m for the period, compared to a profit of £961m in the same quarter from the previous year.
Clearly, an uncertain outlook for the UK economy is unlikely to catalyse the bank’s financial performance in the short run. However, RBS is on track to meet guidance for the current financial year, and is due to produce a 5% rise in its bottom line in the next financial year. This suggests that while it may continue to struggle in the near term, its financial performance may improve to some extent.
The stock currently trades on a price-to-earnings (P/E) ratio of around 10. This indicates that there is a margin of safety on offer, and could mean that the company offers an appealing risk/reward ratio. As such, for investors who can look beyond the current political and economic uncertainty facing the UK, RBS may deliver improving total returns in the long run.
Another FTSE 100 share that is currently facing an uncertain outlook is iron ore miner Rio Tinto (LSE: RIO). Its financial performance could be negatively impacted by the ongoing slowdown in China’s GDP growth rate. The trade war between the US and China is a threat to global growth, and may cause many investors to demand a wider margin of safety across the valuations of mining companies.
Recent updates from Rio Tinto have shown that its financial position is sound. It has a lower level of leverage than many of its sector peers, while the investment it is making in its asset base could strengthen its financial performance in the long run.
Therefore, the stock could offer long-term investment appeal. It currently trades on a P/E ratio of around 9, which indicates that its valuation includes a margin of safety. With a dividend yield of 8%, it could offer income investing appeal. However, its shareholder payouts may prove to be less resilient than some of its FTSE 100 index peers.
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Peter Stephens owns shares of Rio Tinto and Royal Bank of Scotland Group. 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.