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Retirement savings: I’d beat an inadequate State Pension with FTSE 100 dividend stocks

The State Pension currently amounts to just £8,767 per annum, which is two-thirds less than the average salary in the UK. As such, surviving solely on the State Pension in retirement is likely to be highly challenging for the vast majority of people.

Investing in FTSE 100 dividend stocks could help to improve your retirement prospects. Not only could they deliver an impressive rate of capital growth to build a nest egg while you’re working, they may also offer a high income return that provides a passive income when you’re retired.

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With the index currently seeming to offer good value for money, now could be the right time to start investing for your retirement.

Rising price level

The FTSE 100’s performance since its inception in 1984 has been highly impressive. It’s risen from a starting price of 1,000 points to trade at over 7.5 times that amount today. This equates to an annualised return of 5.8%. While that figure is attractive, when the index’s dividends are added to it, the resulting figure is a total return of around 9% per year.

While this may not produce a large nest egg in the short run, when it’s recorded over a long time period it can lead to a generous retirement portfolio from which to obtain a passive income. The impact of compounding may not be evident until a number of years of investing have passed. However, they can be substantial and can make a real difference to your financial situation in older age.

Therefore, while the index’s performance in recent years may not have been as strong as in previous years, for a long-term investor the FTSE 100 could offer the means through which to build a retirement nest egg.

Income opportunities

As well as providing the opportunity to build a retirement nest egg, the FTSE 100 also offers strong income investing potential. At present, around a quarter of its members have dividend yields in excess of 5%.

Therefore, it’s feasible for an investor to build a diverse portfolio of companies that together have an average income return in excess of 5%. This would offer a significantly higher return than other assets such as cash, bonds and property, and may improve your spending power in retirement due to the potential for dividend growth.

With dividends also making up a significant portfolio of the FTSE 100’s total returns since inception, it may be worth focusing your capital on income shares. They could produce a level of retirement savings that enable you to enjoy a generous passive income in older age.

With the State Pension inadequate for most people and the age at which it’s due to be paid expected to rise over next decade, now could be the right time to start investing your hard-earned cash in FTSE 100 stocks.

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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.