Building a portfolio that can provide a passive income in older age may now be a requirement for anyone seeking to enjoy a comfortable retirement. After all, the State Pension amounts to around half the UK living wage for a full-time employee, and is set to be paid from age 67 within the next decade.
Even after a retirement nest egg is in place, generating an income from your capital can be tough. Low interest rates mean that cash and bonds may prove to be insufficient, which could further increase the appeal of dividend shares in retirement.
Building a portfolio
With the FTSE 100 having a price-to-earnings (P/E) ratio of around 14.8, it seems to offer fair value for money at present. Although risks face the world economy, and could impact negatively on the index’s performance in the short run, over the long run the growth potential of the world economy seems to be high.
For example, rising wages in major economies such as India and China are expected to lead to increased demand for a range of goods and services. Since the FTSE 100 has an international bias, it may offer a favourable means of capitalising on the global economy’s growth outlook. Its geographical diversity may also reduce risk, and provide investors with an appealing risk/reward opportunity.
As such, buying a range of FTSE 100 stocks and holding them for the long run could be a worthwhile means of building a retirement portfolio. For a long-term investor, the short-term volatility that shares have displayed in the past may be a risk worth taking due to their track record of outperforming many other mainstream assets.
Generating a passive income
Obtaining a generous passive income from a retirement nest egg was easier in previous years in some respects. A higher interest rate meant an above-inflation income return was possible from assets such as bonds and cash, providing relatively low risk of loss. For many investors, they were a popular means of obtaining a generous income in retirement, while limiting their potential risks.
Now though, bonds and cash offer income returns that are below inflation in many cases. Therefore, unless you have a very large amount of capital available, the 4.4% yield from the FTSE 100 could be a more realistic means of obtaining a worthwhile passive income in older age. Furthermore, with the FTSE 100’s growth potential, its members may be able to offer inflation-beating dividend growth over the coming years. This could further improve your income prospects.
Living solely off the State Pension is unlikely to be a realistic option for retirees due to its low payment and the rising age at which it commences. As such, buying FTSE 100 stocks to build a portfolio, and then holding them through retirement to earn a passive income, could be a means of enjoying a comfortable level of income in older age.
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.
Motley Fool UK 2019