While having no retirement savings at 40 may be worrisome for some, the reality is there’s still time to build a generous nest egg. In fact, the return prospects of the FTSE 100 over a 10- or 20-year timeframe can be surprisingly high – especially when dividend reinvestment is factored in.
Since the index currently appears to offer a wide range of high-quality companies with long-term growth potential, now could be the right time to kickstart your retirement plans.
Investing in FTSE 100 shares at age 40 means you’re likely to have a long-term time horizon. Since the State Pension age is set to move to 67 by 2028, even retiring early means you are likely to have at least two decades until you stop working. This provides a significant amount of time to generate a substantial return from the FTSE 100.
Since its inception in 1984, the FTSE 100 has delivered an annualised total return of around 8%. Assuming it produces the same return over the next 20 years, a £1,000 investment in large-cap shares today could be worth as much as £4,660 in two decades’ time.
Moreover, investing regularly in FTSE 100 shares could lead to a significant nest egg over the same time period. For example, investing £300 per month at an 8% annualised return would produce a nest egg of £165,000.
The FTSE 100 could prove useful not only in generating that nest egg for retirement, but also in producing an income in older age. The index currently has a dividend yield of around 4.5%, which is historically high. As well as suggesting the index offers good value for money, it also means it can provide a relatively high passive income in retirement.
Using the earlier example, a £165,000 portfolio invested in the FTSE 100 could pay dividends of £7,425 per annum. This could significantly boost your State Pension, and provide greater financial freedom in older age.
In addition, it’s possible to obtain an even higher annual yield through buying FTSE 100 shares with the highest income returns. Since around a quarter of the index currently yields more than 5%, it may be possible to generate a 6% or higher yield per annum, while also obtaining a significant amount of diversification to reduce overall risk.
While it’s easy to panic when you have no savings at age 40, the reality is there’s still time to obtain a worthwhile passive income in retirement to supplement your State Pension. As such, it may be prudent to avoid panicking and instead open a tax-efficient account such as a SIPP or a Stocks and Shares ISA to buy a range of FTSE 100 shares for the long run.
The index may not provide a stable return outlook in the short run. But its high yield and growth potential could help you to retire earlier and enjoy greater financial freedom in older age.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.