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Why I’d buy cheap FTSE 100 stocks today to make a passive income in retirement

Making a passive income in retirement from FTSE 100 shares may not seem to be a likely outcome after the stock market’s recent crash. Even after the market has rebounded from its March lows, it continues to trade around 20% down on its price level from the start of 2020. Furthermore, many of its members have cut their dividends in recent months.

However, the index has a strong track record of producing high returns relative to other assets. Therefore, it could be a worthwhile means of building a nest egg over the long run from which to generate a passive income in retirement.

FTSE 100 track record

The FTSE 100’s track record has not been smooth or without difficulties. The index has experienced numerous bear markets during its 36-year existence. Although they occur relatively infrequently, they can wipe billions from the valuations of companies and leave many investors searching for safer assets.

However, the FTSE 100 has an excellent track record of delivering high returns. Even after its 20% drop since the start of the year, the index’s total annualised returns since inception are in excess of 8%. Certainly, in some years the index has delivered negative returns. But long-term investors who adopt a buy-and-hold strategy have generally been handsomely rewarded by sticking with large-cap shares throughout their challenging periods.

With many individuals having long-term time horizons when it comes to investing for their retirement, they are likely to have sufficient time for the index to recover from its present lows. In fact, through buying while many of its members trade on low valuations, investors may be able to beat the index’s past historic returns in the coming years.

Income potential

While dividend cuts across the index may cause some investors to become cautious about investing in the FTSE 100, over the long run, many of those dividends are likely to return. The world economy has never experienced a recession in perpetuity. If economic growth does resume, the profitability of FTSE 100 shares is likely to rise. This could lead to growing dividends that provide you with a generous passive income in older age.

Of course, some FTSE 100 companies are continuing to pay dividends. Businesses operating in sectors such as utilities, consumer goods and healthcare continue to deliver generally sound financial performances. As such, it is still possible to generate a passive income from large-cap shares that beats the income returns on other assets, such as cash and bonds.

Outlook

Although the near-term prospects for the FTSE 100 are highly uncertain, buying large-cap shares while they trade at low prices could boost your retirement prospects. Over the long run, the index is likely to not only recover from its present lows, but go on to deliver new record highs. This could boost the size of your retirement nest egg and allow you to generate a worthwhile passive income 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.