The FTSE 100’s recent performance may convince some investors to buy other assets to generate a passive income in older age. After all, the index has fallen dramatically in the stock market crash. Further short-term risks such as Brexit and coronavirus may even prompt a second decline this year.
However, the long-term prospects for the index suggest it offers strong growth potential. Therefore, buying shares today while they’re cheap could lead to a surprisingly large nest egg that can reduce your reliance on a disappointing State Pension.
FTSE 100 recovery prospects
The prospect of the FTSE 100 providing a retirement portfolio from which to draw a passive income may seem limited at the present time. The index is currently trading around 20% lower than it was at the start of the year. That means many of its members now have low valuations compared to their historic averages.
However, the index has experienced many similar periods in its past. For example, it recorded even greater falls during downturns such as the 1987 crash and the global financial crisis in 2009. It was able to recover from them, as well as every other decline experienced since its inception in 1984.
A return to its previous record highs may seem unlikely right now. However, it’s set to take place over the coming years as trading conditions strengthen and investor sentiment improves.
Building a passive income
The State Pension currently amounting to just £9,100 per annum. So obtaining a passive income from elsewhere may be necessary for many people in retirement. Therefore, buying FTSE 100 shares now while they’re cheap in many cases could be a means of generating high growth in the coming years as the market recovers.
Assuming the index records an 8% annual total return, as it has done in the past, a £250 monthly investment could be worth as much as £375,000 over a 30-year timeframe. From that, a 4% annual withdrawal would produce an income of around £15,000. That’s over 50% more than the State Pension. Therefore, it could have a significant positive impact on your financial situation in retirement.
Investors who are seeking to build a passive income from a retirement portfolio should, of course, diversify across the FTSE 100’s various sectors. Recent months have shown that the outlook for some industries can change rapidly and without prior warning.
Therefore, it’s important to have a good mix of companies. Ones that operate in different areas and rely on different growth catalysts could therefore spread overall risks and improve your return prospects.
As the index’s past performance shows, it has generally outperformed other mainstream assets such as cash and bonds over the long run. The same end result may not seem likely right now due to ongoing economic uncertainty. However, over the long run, the FTSE 100 could reduce your reliance on the State Pension in retirement.
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.