With the cost of living increasing in recent years, it’s not uncommon for individuals aged 40 to have no retirement savings. In fact, with wage growth having been sluggish and rents, as well as house prices, having risen in the last couple of decades, retirement planning is unlikely to have been a priority for many people in their 20s or 30s.
While it’s always a good idea to start as early as possible when it comes to investing for retirement, it’s equally never too late to begin the process of saving for the future. Here’s why it’s still possible to become an ISA millionaire from scratch at the age of 40.
Return potential
The task of generating a seven-figure ISA portfolio has been made easier by increases to the annual allowance. It’s now possible to invest up to £20,000 per tax year in an ISA. With the FTSE 250 having recorded an annualised total return of over 9% in the last two decades, it may be possible for someone aged 40 to generate a seven-figure ISA portfolio within a 20-year time period. This assumes that the FTSE 250 will deliver the same returns in the next 20 years as it has in the last two decades.
As such, for someone who has the capacity to invest £20,000 per annum in shares, it’s possible to retire as an ISA millionaire. Clearly, most people will be unable to put aside that amount of money each year. However, the key takeaway is that at 40, there’s still a long way to go until retirement. The impact of compounding on even modest amounts of money invested in shares each month can be significant, and may lead to a sizeable nest egg by retirement age.
Risks
Of course, investing in shares comes with significant risks. The FTSE 250, for example, has experienced two bear markets in the last 20 years. It has also seen its valuation come under pressure in recent months, with the prospects for the UK economy becoming less certain in the near term due to the Brexit process becoming increasingly complex.
This could mean that the index fails to repeat its returns of the last two decades over the short run. However at 40, an individual would generally be viewed as having a long time period until retirement.
Therefore, taking risk through investing in the stock market may prove to be a better idea than adopting a cautious stance through having a cash ISA, for example. In fact, with inflation ahead of interest rates at present, a cash ISA is likely to lead to reduced purchasing power in the long run, which could harm the prospect of having an attractive retirement income.
Outlook
While it may be worrying on the one hand for an individual with no retirement savings at 40 to contemplate their finances in retirement, it’s not too late to start investing. Through investing even modest amounts in a range of shares within tax-efficient accounts, it may be possible to retire with a sizeable nest egg – and even that magic £1m.
