Investors seeking to build a retirement nest egg to overcome a low State Pension may naturally seek assets other than the FTSE 100 after its recent market crash. The index has rebounded, but still trades significantly below its 2020 starting price.
However, the stock market could offer strong recovery potential over the coming years. Therefore, it may prove to be a superior means of building a retirement nest egg compared to buying Bitcoin or holding your capital in a Cash ISA.
FTSE 100 recovery prospects
The FTSE 100’s track record shows that it has been an effective means of obtaining a retirement fund that can provide a passive income in older age. The index has gained around 8% per annum including dividends since its inception in 1984. Therefore, investing even modest amounts in a diverse range of large-cap shares has been a highly profitable strategy for anyone who has a long time horizon.
With the State Pension age set to rise and its payments currently amounting to around a third of the UK’s average annual salary, large-cap shares offer the chance to reduce your reliance on the State Pension. Although in the short run events such as a market crash can cause the index to fall, it has always recovered from its various downturns over the years to post new record highs.
Other assets such as Bitcoin and Cash ISAs may hold greater appeal at the present time due to the FTSE 100 market crash. However, they may fail to provide a reliable means of generating a nest egg from which to draw an income in retirement.
Cash ISAs face what could be a considerable period of time with low returns. Interest rates could stay at low levels for many years due to the economic challenges faced following the coronavirus pandemic. This may even mean that Cash ISAs produce a negative return when inflation is factored-in. This could lower your spending power and make it more difficult to obtain a retirement portfolio that reduces your reliance on the State Pension when compared to buying FTSE 100 shares.
By contrast, Bitcoin has the capacity to make strong gains. Its price doubled following a decline in the earlier part of the year. However, its risks are also relatively high. Challenges such as regulatory concerns, competition from other virtual currencies and its lack of fundamentals could derail Bitcoin’s progress in the coming years. This may mean that it fails to produce a reliable return as per the 36-year track record of the FTSE 100.
Clearly, buying FTSE 100 shares today may not seem to be an attractive prospect due to the index’s recent decline. However, it is likely to recover, while its past performance suggests that it is set to remain an effective means of obtaining a passive income in retirement that reduces your dependence on the State Pension.
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.