While the State Pension provides a useful income in retirement, it is unlikely to be adequate for most people to live on comfortably in older age. At the present time, for example, it amounts to just £8,767 per year. That’s around a third of the average annual salary in the UK, and suggests that most people will be unable to enjoy financial freedom in older age without a second income.
As such, now could be the right time to buy a range of FTSE 100 shares. They could deliver an impressive income return, as well as long-term growth potential. They could reduce your reliance on the State Pension and improve your financial situation in retirement.
The FTSE 100 may not be viewed as an index that offers strong growth credentials by many investors, but its track record suggests otherwise. The notion that larger companies do not generally offer improving earnings and share price growth is not reflected in the FTSE 100’s performance since it was formed in 1984.
Since then, it has recorded an annualised capital growth rate of almost 6%. When its dividend returns are also included, its total returns per annum are around 9%. As such, investors who have a number of years left until they are likely to retire may wish to invest in a diverse range of FTSE 100 shares to gain an impressive return that could lead to a generous nest egg in older age.
Furthermore, with the index currently containing a number of stocks that appear to trade on low valuations, its future returns could be relatively impressive. With risks such as the coronavirus and political uncertainty in the US and Europe causing investor sentiment to weaken in recent months, now could be the right time to buy large-cap shares while they are undervalued.
As well as its growth potential, the index also offers an impressive income return. It currently yields around 4.4%, but many of its members have higher income returns. In fact, it may be possible for an investor to build a portfolio of FTSE 100 shares that together have an annual income return above and beyond that of the index. In doing so, they could generate a high passive income from their capital compared to other income-producing assets such as cash and bonds.
Looking ahead, the FTSE 100’s income prospects look set to improve. The index’s broad geographic exposure means that it could benefit from the strong growth outlooks for emerging economies, while it could provide diversity at a time when the prospects for the UK economy are relatively uncertain.
As such, for investors who are concerned about being reliant on a disappointing State Pension in older age, the FTSE 100 could offer significant appeal – especially while it seems to offer good value for money.
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.