Forget the State Pension! I’d build a retirement nest egg with FTSE 100 dividend shares

I think the FTSE 100 (INDEXFTSE:UKX) offers long-term growth potential at the present time.

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 1 December, 2019 3:35 pm GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

With the State Pension age set to rise to 67 within the next decade, the payout’s lifetime value is declining. Moreover, even though it could offer strong annual growth, its current level of £8,767 per annum is unlikely to meet the financial needs of most retirees.

Therefore, it could be a good idea to build a retirement nest egg using FTSE 100 shares. At the present time, many FTSE 100 members offer high income returns, strong growth prospects and low valuations. As such, they could help you to generate a passive income in older age.

Market fears

Of course, the stock market currently faces an uncertain period. This is unlikely to abate in 2020, with political risks in the US, Europe and Asia expected to continue over the coming months. Therefore, investors in the FTSE 100 may experience a period of volatility that leads to paper losses at times.

However, such periods have historically been favourable times to buy high-quality businesses. They are more likely to survive whatever economic threats they face, and could even grab market share at the expense of less financially sound rivals. And with many stocks currently trading on low valuations, they could offer wide margins of safety that lead to favourable risk/reward ratios for investors.

Growth potential

Despite investor sentiment being weak at the present time, the outlook for the world economy remains bright. It is expected to grow at a faster pace in 2020 than it has done in 2019, while major economies such as China and India are expected to deliver strong growth over the coming years. This could catalyse the financial performances of FTSE 100 stocks and allow them to reward shareholders through rising dividends.

Over time, their returns could amount to a sizeable nest egg once compounding has had an impact on your portfolio. Since the FTSE 100 currently yields 4.5%, and it is possible to obtain an even higher yield from many of its members, it may be able to offer a rising passive income in older age.

Investing today

Therefore, now could be the right time to invest for your retirement. The returns on other assets, such as cash and bonds, are significantly lower than FTSE 100 shares. This may mean that they do not improve your retirement prospects, and could even fail to keep up with inflation over the medium term.

By obtaining a diverse range of FTSE 100 shares, you can reduce overall risk. This may lessen the impact of a potentially volatile period in 2020 and buying during such a time has proven to be a successful strategy in the past. It could improve your retirement prospects and help to increase the size of your portfolio in the long run so that it can offer a higher passive income in older age.