The FTSE 100’s recent crash may cause some investors to invest in less risky assets to build their retirement nest eggs. The index has fallen by as much as 35% this year, which could be detrimental to your retirement plans in the short run.
However, the FTSE 100 could deliver a strong recovery in the coming years. In doing so, it may improve your retirement prospects. And it could help you to overcome what is likely to be an inadequate State Pension.
The FTSE 100’s recovery potential may not seem to be especially high at the present time. Sadly, the number of coronavirus cases continues to rise. And equally sadly, the economic impact of the outbreak could prove to be high. The FTSE 100’s members face challenging trading conditions that hamper their ability to generate improving levels of profitability.
However, the FTSE 100 has faced challenging economic periods in its past. The most notable recent example is the global financial crisis. This occurred over a decade ago and the FTSE 100 managed to make a full recovery. Certainly, there were times during the financial crisis when it seemed as though the index would never trade at close to 7,000 points again. But with low interest rates and quantitative easing measures, the index was able to post a new record high.
In the coming years, the FTSE 100 is very likely to once again produce strong returns. As such, investors who have a long time horizon may wish to capitalise on the index’s cyclicality. How so? Through buying a diverse range of shares today.
State Pension prospects
Buying FTSE 100 shares today could be even more worthwhile due to the prospects for the State Pension. The State Pension age is expected to rise to 68 in the long run, while the annual payment currently amounts to just £9,110 for the 2020/21 tax year. This is around a third of the average annual wage in the UK, and is unlikely to be a sufficient amount of money to provide financial freedom for most retirees.
Therefore, now could be the right time to buy a range of FTSE 100 stocks in an ISA. Doing so means you are able to potentially benefit from the index’s recovery over the long run in a tax-efficient account. The index also has a strong track record of delivering dividend growth that is ahead of inflation. Since it currently yields around 6%, its potential to produce a generous passive income by the time you retire could be relatively high.
As such, while further FTSE 100 declines cannot be ruled out in the short run, building a retirement nest egg at the present time could help you to overcome the inadequate State Pension. This could enable you to enjoy greater 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.