Here’s why I’m buying FTSE 100 stocks to generate passive income in retirement!

Is the State Pension age going to rise to 71? Royston Wild explains why he aims to keep buying FTSE 100 stocks to avoid delaying his retirement.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m taking steps to generate a healthy passive income for when I eventually retire. It involves creating a balanced portfolio, dominated by top-quality FTSE 100 (and to a lesser extent FTSE 250) stocks.

Like all of us, I plan to enjoy my older years to the fullest after a lifetime of work. But I’m wary of how I’ll be able to do this with state assistance. By taking steps today, I hope to become financially independent in retirement regardless of what happens with the State Pension.

Latest research on Monday underlines the wisdom of such a strategy. Give me a few minutes to talk you through its key points, and to tell you what I plan to do next.

Waiting to 71?

The age at which Brits can claim the State Pension is scheduled to rise steadily in the coming decades. It will increase to 67 between 2026 and 2028. And it is set to rise to 68 from 2044.

Research from the International Longevity Centre suggests that current plans may be wishful thinking, however, as the UK grapples with a growing elderly population and fewer people in the workforce.

The organisation says that the State Pension age “would need to be 70 or 71 compared with 66 now to maintain the status quo of the constant number of workers per state pensioner“.

FTSE 100 returns

I don’t know about you. But I have no plans to carry on working until I’m in my 70s to keep the lights on. I’m reclaiming control by making a regular investment in UK shares in my Stocks & Shares ISA.

If things go to plan, I won’t have to fret over future policy concerning the State Pension. Past performance is not a reliable guide to what will happen. But if the long-term return on FTSE 100 stocks stays the same, I stand to make a very decent income for retirement.

The UK’s leading index of blue-chip shares has delivered an average annual return of 7.5% since its inception in 1984. If this remains the same I could potentially make a passive income of £26,950 every year. And that’s excluding any benefit I would receive from the State Pension.

A £26,950 passive income

This is thanks to the mathematical miracle of compounding. This involves the reinvestment of dividends to allow me to earn money on those on top of any investments I make from my wage packet.

Let me show you how this would work in reality. If I invested £500 each month I would — after 30 years, and assuming that 7.5% average on FTSE shares remains the same — have built a magnificent nest egg of £673,723.

I could then turn this into a decent yearly passive income of just under £26,950. That’s assuming I draw down 4% of my pension pot every year.

Investing in shares can be a wild ride at times. However, over the long term it can be a great way to build cash and achieve financial freedom in retirement. It’s why I plan to continue building my UK stocks portfolio instead of, say, putting my money in a low-yielding cash account.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »