Having no retirement savings at 40 isn’t all that uncommon. However, now could be the right time to start planning for retirement. A simple means of doing so could be to follow one of the world’s most successful investors: Warren Buffett.
His value investment style is a simple and popular means of building a portfolio which could one day provide you with a generous passive income through which to enjoy financial freedom in older age.
One area Buffett focuses on is cash. Although he has made billions through investing in the stock market, he always maintains a relatively high cash balance. This provides him with peace of mind, as well as the capacity to capitalise on weak performance from the stock market, in terms of buying undervalued shares.
Therefore, the first step to take in building a retirement fund may be to ensure you have sufficient cash to cope with unexpected costs. They may range from car repairs to a period without work. Either way, ensuring you have sufficient cash to survive unexpected events could be even more important than building a retirement nest egg.
Anything above and beyond your cash requirements may be better off invested in shares, rather than other assets such as a Cash ISA or bonds. Put simply, the stock market has the capacity to provide significant long-term returns for any investor. As Buffett’s career shows, focusing on the long term potential of a business, rather than the short-term uncertainty which seems to always exist, can be a sound means of generating a large portfolio.
For example, at the present time there are a variety of risks facing UK investors. They range from Brexit to a global trade war, and from a weak outlook for the European economy, to geopolitical risks in the Middle East.
While they could prompt a recession or bear market, in the long run the stock market has always recovered from the challenges it has faced. In other words, being able to look beyond short-term risks and invest for the long term could be a shrewd move.
This could equate to buying high-quality shares that trade on low valuations, with a range of FTSE 350 stocks currently offering wide margins of safety compared to their intrinsic values.
Buffett’s investment strategy also focuses on allowing compounding to positively impact on long-term investment returns. As such, he holds his best investments over decades, rather than years.
For someone aged 40, the same approach may prove to be highly worthwhile. Since the retirement age will rise to 67 over the next decade, buying high-quality stocks today and holding them for 25+ years is highly feasible. During that time, compounding could have a significant impact on the size of your nest egg, and lead to an impressive passive income in older age.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.