I’m not going to sugar-coat this: if you are 50, you have just under 20 years to save for retirement. It’s going to be tougher than if you had started with no savings at 40, because the process of compounding works best when it’s carried out for the longest.
In fact, the biggest absolute returns from your investments will arrive in the final years of your saving period – the further away that is from now, the bigger those gains will tend to be.
Sacrosanct saving and investing
But it’s not too late, and I reckon you still have a shot at retiring with a million, but you’ll have to work hard at it. And my first tip is that you immediately acquire the habit of regular monthly saving.
I’m assuming you have an income. Now, you need to set up a standing order to your investments account and make it a big one – as much as you can possibly afford each month. It almost goes without saying that you’ll probably need to downsize your life a little to economise wherever you can, so you can divert the money you would have spent to your savings.
My second tip is to make saving sacrosanct. Treat it like any other unavoidable expense such as paying the mortgage. And aim to increase it every time your income rises and at least every year.
I wouldn’t bother with cash savings accounts, not even those that tie your money up for a period and pay a higher interest rate. Why? Because the interest rates still won’t be high enough to compound your money to a million in the time frame.
There is a case for investing your monthly savings in index tracker funds such as those that follow the fortunes of the FTSE 100, FTSE 250, and America’s S&P 500. Typically, we can expect annualised returns in low- to mid-single-digit percentages from funds such as those. But that rate of return is probably not high enough for you to achieve your goal in the short, 20-year or so time frame.
The case for shares
Instead, I’d invest in carefully chosen individual shares backed by a single company and that’s my third tip. You can spread your risk by investing in several of them, but with shares, you have a decent shot at compounding your way to a million because the returns can be greater.
But where should you start with individual shares? There are many ways to approach investing, but I’d focus on quality first. Study indicators that reveal a company is operating in a solid trading niche, such as profit margins, consistency of earnings, and rates of return on equity and capital. Next, I’d look for value and buy those quality shares as cheaply as I can. Then, I’d look for operational and share price momentum.
With that powerful triangle of supports in place, I could be on to a winner. But I could still be wrong. Therefore, I’d cut my losses, only run my winners, and try to realise when I’ve ‘won’ on the stock market, which means I’d be prepared to sell an investment at some point, even if it’s just to crystallise my gains.
