One of the challenges facing governments across the world is an ageing population. In the UK, the ‘baby boomers’ generation is now entering retirement, with life expectancy also set to increase.
As a result, it seems likely that there will be further increases to the retirement age over the coming years. Due to this, failing to invest in the Footsie now could mean that an individual is required to work for longer than they had planned.
Increasing pressure
Although the retirement age is set to increase to 66 for both men and women in 2020, followed by a further rise to 67 between 2026 and 2028, the reality is that further increases are extremely likely. Put simply, there are a large number of people set to reach retirement age over the next couple of decades, and paying for their state pensions may become an increasingly difficult task for individuals of working age.
For example, in 2016 there were around 12.5m people of pension age in the UK. This represented 31% of the workforce, which is 1% higher than the figure from 2015. By 2030, the proportion of the working age population that will be of state pension age is expected to reach 32% (14m), followed by further growth in the following decade. By 2040, there are expected to be 16.6m people of state pension age, which would represent an estimated 37% of the working age population.
Rising life expectancy
Of course, increasing life expectancy is a key reason for the expected increase in people of state pension age. While today a man is expected to live for a further 22 years when he retires, and a woman for 24 years, by 2040 those figures are forecast to be 25 and 27 respectively.
As such, in future it may be argued that the retirement age of 66 (or 67 in 10 years’ time) is inappropriate, given how long retirement will be. The result of this could be a general consensus that people should work longer before they are able to receive the state pension.
Footsie returns
For individuals who do not wish to work until they are well into their 60s (or even their 70s depending on future government policy), the Footsie provides a realistic alternative. It has a strong track record of delivering total returns in the high-single digits, with the FTSE 250 offering even better returns than the FTSE 100 in the last 20 years.
In fact, an individual investing £250 per month in the mid-cap index since 1998 would now have a nest egg of around £170,000. That’s more than four times the average private pension pot at retirement in the UK. Of course, investing for longer than 20 years is likely to provide an even greater sum upon retirement. In the long run, the index may become increasingly appealing if the pension age rises yet further.