Planning for retirement with the FTSE 100 index in mind

  • December 06, 2019 01:27 PM GMT
  • Team Kalkine
Planning for retirement with the FTSE 100 index in mind

Wouldn’t it be great, if one did not have to go to work or have to earn for a living and have enough resources to last a lifetime with the independence to live a lifestyle of choice. Well we all know movie stars, erstwhile kings and emperors and their dependents and extremely wealthy people do live lives like that or at least it appears to be so. But can a salaried class citizen ever dream of such a life. Well as it turns out it is possible if one saves in the early part of his working age and does some careful investing, he should be able to save enough towards the middle part of his life so that he would not need not work for the rest and live a life of comfort and bliss without having to worry about finances ever. Retirement planning is now an established and mature practice, it is available through banks, insurance companies and even through financial advisors, done properly it can ensure not only a lifetime of financial independence but also provide for major expenditures of children education, real estate purchase and even holiday planning. Retirement planning as part of financial planning also helps an individual determine his goals in life and plan accordingly to achieve the same in a time bound manner and prepare and provide for the same in the most efficient manner possible.

Though Retiring early may seem a good idea, this only means retirement from work and not retirement from life. The above four steps while helping a person transit into a less burdensome life, doesn’t speak of how one must plan to live a life in retirement. A retirement should never mean loss of productivity for a human being, a healthy life essentially involves being moderately active which would involve some activity whether with pay or without pay which will keep an individual engaged and keep his mind and body healthy. It is an observed fact that people who live an active life post their superannuation have lesser health complications and live longer. It has also been observed that after retirement a sense of worthlessness often sets into an individual which over a short period of time severely deteriorates his mind and body, taking up a new hobby or objective after retirement gives an individual a sense of purpose and worth.

Today we will take a look at the retirement planning with a wealth creation process focused on FTSE 100 companies. The companies on this index are not only the largest and most stable companies on the London Stock Exchange but also possess long term value creation potential with least risk. From an income perspective also, these companies offer stable dividend earnings though yield may be low on account of high prices of these stocks. Below we discuss a few ideas regarding how one can invest in FTSE 100 companies for long term value creation and income or as may be preferable to an investor who is planning for his retirement.

  1. Actively managed FTSE 100 ETF – The best option to invest to create value is to invest in an ETF. An Exchange traded fund or ETF is a type of exchange traded product and its units are traded as typical financial instrument. Just like a passive index fund, an ETF also represents a basket of stock assets that would reflect a popular stock index. ETF units are traded just like the stocks of any other company on the stock exchange. By buying units in an ETF, an investor receives two important benefits – the diversification of an index fund plus the flexibility of trading financial assets. Other than that, the investor will get the benefit of professional management with the scope of getting higher returns. The only downside of this is the higher management cost that the investor has to bear.
  1. Actively managed FTSE 100 Styled Mutual fund – For a risk averse investor, a better option is a FTSE 100 styled Mutual Fund. Mutual funds offer more regulation and safety while having less returns potential than an ETF or direct investment in the stock markets. Here also the investor gets the benefit of professional management albeit at lesser management cost compared to an ETF.
  1. Passive FTSE 100 styled dividend fund - These funds tend to limit their portfolio churning and save on the transaction and management costs while capitalizing on the dividend earnings as the primary sources of returns of the portfolio. The result is a low cost, low risk and a smaller yield portfolio. Such funds are suitable for investors who have a very low-risk appetite and would be willing to invest their funds for a very long time. However, in short to medium term, such funds are not always a popular choice. During times of rising interest rates, an investor may find that he could get a better yield investing in a debt fund than a pure passive dividend yield fund given the same level of risk. Thus, the popularity of these funds is limited to times when the general economic conditions are down, the business activity is low, and interest rates are also falling, which would explain their popularity during these times of economic uncertainty that has currently gripped the world psyche.
  1. Actively managed FTSE 100 styled dividend fund - It is possible, however, to make some variations in this strategy and do away with a little bit of this safety with a higher potential return. A dividend fund, while not losing its overall character can still employ these strategies and earn a better return while still targeting dividends as its sole source of earnings, albeit at slightly higher management and transaction costs. There are companies that are still in their growth phase and have only recently started to give out dividends, and they try to balance out their fund corpus between funding the growth opportunities available before them and rewarding back their investors. Such stocks are great opportunities for a dividend portfolio as these stocks may now be available at lower prices, with a rising rate of dividend Over a period of time, when these companies become more established, their prices would have risen and also, they would have raised their dividend payouts. A portfolio which had held these stocks when they were still in their growth phase would now have a high yielding component which would increase the overall return profile of the same.



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