The prospects for savings accounts continue to be relatively unfavourable. Interest rates are forecast to stay at relatively low levels over the coming years, which may mean cash holdings fail to provide attractive real-terms returns.
As such, buying FTSE 100 shares could be a better means of obtaining a high passive income in older age. With the State Pension amounting to £8,767 in the current year and therefore inadequate to provide financial freedom for most retirees, large-cap shares could be a rewarding investment in the long run.
Although predicting the future path of interest rates isn’t an exact science, updates during 2019 from the Bank of England suggest they’re unlikely to rise at a fast pace. A modest level of inflation, which is in line with the Bank of England’s target, and a challenging economic outlook mean that policymakers may be cautious about raising interest rates until they’re sure a supportive monetary policy is no longer required.
The effect of this on savings rates could be disappointing. After a decade-long period of low interest rates which have led to most savers experiencing a reduction in the spending power of their cash, further misery could be ahead. This may ultimately mean that cash savings do little to help retirees overcome the low level of State Pension which is currently available to them.
While the past performance of the stock market will not be exactly repeated in future, the FTSE 100’s track record highlights its growth potential. As an index that generates the majority of its revenue from the international economy rather than from the UK, it has exposure to regions that could enjoy sustained high growth in the coming years. This may translate into rising top and bottom lines for FTSE 100 stocks, enabling them to pay higher dividends.
Rising dividends could be good news for retirees searching for a passive income, as well as individuals who are seeking to build a retirement nest egg. The reinvestment of dividends can lead to improving total returns that increase the size of a retirement portfolio, while inflation-beating income growth may enhance the financial freedom of retirees.
Therefore, investing in FTSE 100 shares that have the capacity to pay higher dividends, and which may benefit from global growth prospects, could be a shrewd move. It may enable an investor to obtain a high-single digit annualised total return from investments in the FTSE 100.
Doubling your State Pension may sound like an unlikely eventuality. However, investing £200 per month over the course of 40 years at an annualised return of 8% could provide a retirement nest egg of around £620,000. Assuming a 4% income return, this could offer an annual income of £25,000, which is significantly more than double the current level of State Pension. Therefore, starting to invest in FTSE 100 shares today could be a worthwhile move.
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.