Many people who don’t have any retirement savings at the age of 40 may be concerned about their financial prospects in older age. This may be compounded by the fact the State Pension currently amounts to just £8,767 per year, which is unlikely to provide financial freedom in retirement.
However, it’s never too late to start planning for retirement. By starting early, focusing on assets that offer significant return potential and reinvesting your profits, it may be possible to boost your post-work prospects in order to reduce your reliance on the State Pension in older age.
The earlier you can start to invest, the greater the potential to generate a large retirement nest egg. For example, investing for 20 years rather than 10 at an annual return of 8% would lead to a total return of 366%, instead of 115%. As such, starting to invest even modest sums of capital on a regular basis now, rather than delaying it any further, could lead to a larger income in retirement.
Clearly, with risks facing the world economy at present, many investors may determine that it’s better to wait for a calmer period before investing for retirement. However, there are always risks facing the world economy, which means there may never be a perfect time to invest. Moreover, in many cases, risks are priced in by investors, which provides the opportunity to buy assets for less than their intrinsic value.
Consider the stock market
Starting to plan for retirement at 40 means you have a long-term timeframe. This suggests you’ll have adequate time for short-term losses to recover, which may mean you can take risks with your capital.
As such, focusing on the stock market, instead of lower-risk assets such as cash and bonds, could be a good idea. It may provide a higher rate of return that ultimately leads to a larger retirement nest egg, since the stock market has historically outperformed other mainstream assets. By obtaining a diverse range of stocks within your portfolio, it’s possible to reduce overall risk and also benefit from the growth opportunities presented by a variety of geographies and sectors.
While it may be tempting to spend your dividends and capital returns, reinvesting them for older age could be a much better idea. This will enable you to benefit from the impact of compounding, which can produce surprisingly large returns over the long run.
Clearly, investing for retirement is a long-term process, and it’ll take time to build a nest egg that can provide a passive income in older age. However, by starting today, investing in a diverse range of shares and allowing compounding to positively impact on your portfolio, it may be possible to reduce your reliance on the State Pension.
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