While the State Pension could provide a welcome income boost in your retirement, it is unlikely to offer financial freedom in older age. In fact, it amounts to just £730 per month, which is unlikely to even cover spending on essential items in retirement.
As such, living within your means and investing your spare capital in FTSE 100 companies could be a worthwhile move. They could provide long-term capital appreciation that contributes to a nest egg from which you are able to draw a generous income each year in retirement.
With the world economy facing a period of uncertainty, now could be the right time to buy undervalued FTSE 100 shares for the long run.
Long-term growth potential
The FTSE 100’s long-term growth potential remains relatively high. Despite doubling in price since reaching the lows of the financial crisis in March 2009, the index continues to offer the prospect of high total returns.
Part of the reason for this is the growth potential of the world economy. With emerging markets such as China and India set to experience GDP growth of above 6% per annum over the next few years, as well as rapidly-rising wages, the financial prospects for a wide range of FTSE 100 shares remain positive.
As such, the index could realistically produce an annualised total return of 7%-8% over the long run. While this may not sound especially high, the impact of compounding over a long-term time period may mean that it offers the chance to build a sizeable nest egg for a variety of investors.
For example, investing £100 per month in the FTSE 100 at an annualised return of 7% over a 40-year timeframe could mean that you have a nest egg of around £240,000. From this, you could potentially generate an annual income that affords a higher standard of living in older age than that offered by the State Pension.
Risk/reward
As mentioned, the FTSE 100 faces a period of uncertainty at the present time. Risks such as a global trade war and Brexit may weigh on its outlook.
However, the index continually faces risks and, from time to time, experiences downturns. For example, the dotcom bubble and financial crisis induced two major bear markets in the last two decades.
The FTSE 100, though, has always been able to recover from difficult periods to post new record highs. As such, buying during uncertain periods can prove to be a sound long-term move, since it enables you to access lower valuations for high-quality shares.
As such, from a risk/reward ratio, the FTSE 100 could be appealing at the present time. With there being a clear risk that many people will struggle to live off the State Pension in retirement, investing in FTSE 100 shares over a working lifetime could be a solution that offers financial freedom in older age.
