Why the FTSE 100’s decline could help you beat the State Pension
The FTSE 100’s decline since May has caught some investors by surprise. Many had expected further record highs for the index after what had been an incredibly successful period since the financial crisis.
However, that has not turned out to be the case. The index has declined by around 15% since May, and further near-term falls would be unsurprising. After all, risks such as rising US interest rates and a trade war are present.
This, though, could represent a buying opportunity, with the index currently yielding around 4.7%. And with the State Pension age set to rise in future years, buying large-cap shares could be a shrewd move from a retirement savings perspective.
State Pension
Over the next two decades, the State Pension age is set to increase to 68. Given the increasing related cost, due to longer life expectancy and an ageing population, there could be further rises during that time. As a result, individuals seeking to cease working at what has traditionally been the retirement age of 60 or 65, will need to have additional funds in place to do so.
Furthermore, the State Pension continues to be inadequate for most people. Although £164 per week is very welcome at any age, it’s insufficient for most people to enjoy the financial freedom they have worked hard for during their lives. It equates to one third of the average UK salary, which means that other sources of income will be needed in older age for the vast majority of people.
FTSE 100
While the fall in the FTSE 100 over recent months may cause some investors to worry, the reality is that it could also present buying opportunities. The index now has a dividend yield of 4.7%, which is at the upper end of its historic yield chart. This suggests that it offers a wide margin of safety and could offer good value for money at the present time. It has the capacity to not only provide a handsome income return over the next few years, but low valuations could allow a number of its constituents to post a high level of capital growth in the long run.
Of course, there could be further challenges for the index. As mentioned, risks such as a rising US interest rate and the possibility of a trade war may hold back its performance in the near term. But for investors who are focusing on the long term, and who have the patience to ignore short-term price movements, the FTSE 100 may help them to overcome the inadequacies of the State Pension.
Indeed, through buying a diverse range of stocks which offer the potential for improving long-term returns, it may be possible for investors to enjoy financial freedom in older age – even if the State Pension age continues to rise.
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