Having no savings at age 50 doesn’t necessarily mean you’ll be reliant on the State Pension in retirement. There are still 15+ years left until you are likely to retire, during which time you may be able to live within your means to build a retirement nest egg.
One challenge in planning for retirement is that cash savings offer an exceptionally low return at the present time. As such, they’re unlikely to improve your retirement prospects, and could even lead to a loss of spending power in older age.
As such, now may be the right time to buy FTSE 100 shares to obtain a relatively high return between now and retirement, as well as a generous income return in older age.
Over the next 15 years, the returns from FTSE 100 shares are likely to be significantly higher than those from cash savings. At the present time, cash savings generally offer returns that are less than 1.5% per annum.
This is similar to the rate of inflation, and may mean that the spending power of your capital doesn’t materially improve between now and retirement. The interest rate on cash savings may not improve significantly owing to uncertainty surrounding the UK’s economic outlook and a desire among policymakers to support its future prospects.
By contrast, the FTSE 100 does have a solid track record of posting annual returns of around 9%, when its dividends are included. Over a 15-year time period, this could mean that a regular investment of £200 per month grows to a value of around £70,000. The same regular investment in a cash savings account, which delivers a return of 1.5% per annum, would be worth £40,000 by the end of the period.
As well as offering a better opportunity to build a retirement nest egg than cash savings, the FTSE 100 could deliver a stronger passive income in retirement. The index currently yields around 4.4%, which is around three times higher than the income from a cash savings account.
As such, when you do choose to retire, holding large-cap income shares could be a better means of improving your annual income versus relying on cash savings to fund your retirement.
Since the FTSE 100 offers a wide range of companies operating in different economies and sectors, it provides a significant amount of diversification potential. The cost of buying and selling shares is relatively low after the growth in popularity of online sharedealing. This means that putting together a portfolio of 20-30 stocks to reduce overall risk is a viable option for almost all investors.
Therefore, starting to plan for retirement through buying FTSE 100 shares, and holding them through older age to generate a passive income, could be a sound move – especially while cash savings returns are exceptionally low.
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.