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How investing just £1 per day in FTSE 100 stocks can help you beat the State Pension

Investing in the FTSE 100 may seem to only be worth doing if you have a large amount of capital. However, that’s not necessarily the case. Even investing £1 per day can lead to a sizeable retirement nest egg which provides a worthwhile passive income in older age.

As such, with it being cheaper and more cost-effective than ever to buy FTSE 100 shares, now could be the right time to start planning for your retirement in an era where a rising State Pension age is likely to become the norm.

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Compounding

The FTSE 100’s growth rate may have stalled over the past few years, but it has a long and robust track record of delivering impressive returns. In fact, since it was first started in January 1984, the index has returned 9% per annum when dividends are reinvested. Over the long run, this could turn even modest sums of capital into surprisingly large amounts.

For example, investing £365 per year (or £1 per day) could produce a nest egg valued at around £191,000 during a 45-year working lifetime. From this, you could obtain an annual income of almost £8,500 due to the FTSE 100 offering a dividend yield of 4.4%.

Certainly, the more you’re able to invest and the more time you have available for compounding to catalyse your returns, the larger your eventual nest egg is likely to be. However, the example serves to show that investing even modest amounts of capital, which are likely to be achievable for the vast majority of people, could be a worthwhile means of planning for retirement.

Investment opportunities

Perhaps the simplest and most efficient means of investing in FTSE 100 shares is through a Stocks and Shares ISA. It can be opened online in a matter of minutes, and its administration fee is often affordable for the vast majority of investors.

For individuals with modest amounts of capital available to invest, focusing on a FTSE 100 index tracker fund could be a sound move. It provides a high degree of diversification as well as the opportunity to capture a very similar return to that of the wider index. Tracker funds are also cheap to buy and own, in most cases, and will therefore not eat into your overall returns to a large degree.

After a period of time, you may wish to start buying individual shares. They could provide the opportunity to outperform the wider FTSE 100 and may enable you to obtain a larger portfolio value from which to draw a passive income in older age.

Clearly, diversifying across a range of shares is imperative to reduce overall risk. With the index appearing to offer numerous stocks that have growth potential and which are trading at a reasonable price, now could be the right time to start buying FTSE 100 stocks to improve your prospects of enjoying financial freedom in older age.

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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.