I’m no longer 40 years old but if I was and had no retirement savings, I’d follow the same strategy as I do in my 50s, and invest in FTSE 100 stocks.
Although the first thing I would do is kick myself, for leaving it so long to take investing seriously. That’s because I have learned that the longer my money sits in the market, the more time it has to compound in value. That is particularly important when investing in the FTSE 100, as it is packed full of top dividend stocks paying mighty yields.
I’d pile into FTSE 100 stocks
Some of my favourite companies on the index haven’t delivered much share price growth over the last five years or so. Many have fallen sharply over the last 12 months. That doesn’t put me off, because they now look dirt cheap and their yields are huge. Many of my favourite FTSE 100 stocks yield between 5% and 8%. Some pay even more than that.
If I was 40, I would reinvest all my dividends straight back into my portfolio, again, exactly as I do today. My reinvested dividends would pick up more stock, which would pay more dividends, which I would reinvest to buy yet more stock.
This is a virtuous circle and even I started from scratch at 40, I would still expect to build a decent pot of money by the time I reached state pension age.
Let’s say my FTSE 100 shares delivered a total return of 7% a year, which is roughly the long-term average across the index. If I invested a lump sum of £10,000, that would grow to £62,139 by age 67 years. That’s a pretty decent return.
If I followed that up by investing £300 a month, which is £3,600 a year, I would end up with a thumping £349,050. Again, this assumes 7% a year growth.
I’d buy cheap value stocks
Here’s another thing I would do. I would increase the amount I invested each year, to keep up with inflation. Let’s say I increased that £300 monthly contribution by 3% a year. By the time I hit 67, I would have £446,624 in total.
Of this, £290,069 would have been pure profit from compound growth. That’s an impressive two-thirds of my total portfolio.
I think now is a tempting time to start buying FTSE 100 stocks because the index is packed full of bargains. I can scarcely believe my eyes when I see dividend aristocrat Legal & General Group trading at 6.87 times earnings and yielding 7.94%. Or housebuilder Taylor Wimpey, whose valuation has tumbled to just 5.28 times earnings, while it yields 8.91% a year.
Mining giant Rio Tinto is currently valued at just 4.09 times earnings and yields a staggering 12.09%.
Of course, dividends are not guaranteed, and share prices can always fall. No stock is ever totally safe. That’s why I would invest in a balanced spread of FTSE 100 stocks, to spread my risk. I would also pay in as much as I could afford today, to ensure a comfortable retirement tomorrow. That would apply whether I was 30, 40, 50, or older.