Forget the State Pension, the FTSE 100 may be all you need

You can safely forget about the State Pension and concentrate on getting your work-life balance right. No matter how much you worry about it you won’t get your hands on a penny until you reach retirement age anyway, and when you do it’s only worth £164.35 per week at the current rate. You may not even get all that because the amount you receive will depend on your National Insurance record. If it’s been patchy with long periods not working, you could be in for a shock.

Passive, uncomplicated and effective investing

But you can take action right now to build an independent retirement pot of money using nothing more complicated than the FTSE 100 index. In fact, if you replicate the returns of the FTSE 100 over say a 20-, 30- or 40-year period and automatically re-invest your dividends along the way, the money could grow substantially due to the effects of compounding.

You don’t need a complicated investment strategy to gain decent returns. The statistics tell us that many investment fund managers and private investors fail to keep up with the returns from the FTSE 100. So, by investing in an FTSE 100 tracker fund you’ll be ahead of many, right from the start.

The FTSE 100 contains the largest 100 companies by market capitalisation on the London stock market and they make up around 80% of the market’s entire value. So, by investing in a FTSE 100 tracker fund you will be following most of the market and the performance of your invested money will depend on the underlying performance of 100 companies, so you will have all the advantage of reduced risk that comes from diversifying across many firms.

Can you spare a couple of hours to set this up?

However, it’s a good idea to put money into your index tracker fund in stages rather than all at once. A regular monthly payment set up with a standing order from your bank account would be ideal. By dripping money into your FTSE 100 tracker you will benefit from pound-cost averaging, which means you reduce the risk of putting a lump sum into the market just before it falls. Instead, your regular payments into your tracker fund will be evenly spaced and if the index falls you’ll get more for your money. Historically, the FTSE 100 has always bounced back from its dips, so buying a bigger share of your investment when its down is likely to be a good thing.

I’ve been bullish about the longer-term prospects for the FTSE 100 for some time. In the past, there have been periods when the index has trebled in value in a few short years and I believe that it could treble again from where it is now. But even if it doesn’t, if you select a fund with accumulation units, which automatically re-invest your dividends back into the same fund, the process of compounding will still work its magic to grow your retirement pot over time. You can hold most tracking funds in a stocks and shares ISA, which could further increase your returns because there will be no tax to pay on your gains. Setting all this up won’t take long, and once you have, all you need to do is increase your standing order every year or whenever you can – then look forward to a happy financial retirement.

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Kevin Godbold 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.

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