Looking forward to retirement? The unfortunate reality in this country is that if you are planning to rely solely on the State Pension in your old age, then you will be unlikely to enjoy many of the things that make life worth living. At just £8,767 per year (only £168.60 a week), this will barely give you enough to subsist on, even assuming that you own your own house and have paid off your mortgage.
The good news is that there are alternatives to the State Pension. By investing your hard-earned cash in the stock market, you can harness the power of compound interest and build up a sizeable nest egg, all without having to live like a hermit. Here’s why I think that the FTSE 100 offers savers an excellent way to grow their wealth.
Stocks can be less risky than bonds
A commonly-held belief about stocks is that, while they certainly demonstrate higher growth than bonds, they are also risker as investments. Certainly, the day-to-day swings seen in stock prices make it seem like this is so. By contrast, bonds pay out a steady stream of income, and the conditions of these payouts tend not to change over time. But in reality, the stability of bonds ends up being a net negative for investors.
We live in an inflationary world, meaning that every day, the value of the cash in your pocket is eroded little by little. £100 today is worth more than it will be in the future, and with central banks continuing to pursue expansionary monetary policy, this will continue being the case. In layman’s terms, this means that central banks are increasing the amount of money in circulation, which decreases the value of existing money, both in the form of cash and bank deposits. So if you buy a long-term bond, you are locking yourself into a stream of cash payments whose value will keep declining.
By contrast, if you buy a basket of FTSE 100 stocks, you are throwing your lot in with British business. Over the last 25 years, the FTSE 100 has returned an annual average of 6.4%, assuming reinvestment of all dividends. That’s not bad, especially when you compare it to the rate of inflation, which has run at just over 2% over the course of the last decade.
Let’s put some numbers on that, and take that annual average of 6.4% to be fair. If you begin saving at age 26, and invest £5,000 into the FTSE 100 every year (£417 a month, or £96 a week), then by the time you hit State Pension-eligibility at age 67, that amount will have compounded to £1,038,133!
Now think about how much money you spend a week. I think that most of us can probably find a way to save £100 a week by trimming our spending habits. It might be tough in the short term, but I think that ensuring a happy and carefree retirement is worth it.
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Neither Stepan nor The Motley Fool UK have a 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.