Having no retirement savings at 40 doesn’t necessarily mean you’ll be solely reliant on the State Pension in older age. After all, there are still 20-plus years left until you retire, during which time it’s possible to build a sizeable nest egg which can be used to generate a passive income.
With the cost of having a pension and investing in shares having fallen in recent years, now could be the right time to start your retirement savings plan. Moreover, with the FTSE 100 and FTSE 250 trading on low valuations, there may be significant growth opportunities ahead that help you to become less dependent on the inadequate State Pension.
Having those 20-plus years until retirement means there’s time enough for the stock market’s returns to generate a surprisingly large nest egg. For example, in the last 20 years, the FTSE 250 has risen from around 5,900 points to trade at its current level of 20,400 points. This works out as an annualised return of around 6.4%. When dividends are added to that figure, it is over 9% per annum.
A similar rate of return could be very achievable over the next couple of decades. The FTSE 250 currently has a dividend yield of around 3.1%, which is above its long-term average. This indicates that the index may offer a margin of safety that translates into higher returns for investors over the coming years.
As such, it may take less than eight years for an investment in mid-cap shares to double in value, which could mean there are high returns ahead for someone who starts investing aged 40.
Planning for retirement
One of the key parts of seeking to build a retirement next egg is ensuring your investments are tax-efficient. This can add significant sums to your nest egg, since 20-plus years of growth in FTSE 100 or FTSE 250 shares can lead to a large portfolio value.
Therefore, it may be worth considering tax-efficient products such as a Stocks and Shares ISA, or a SIPP. They’re generally relatively cheap to set up and administer, and can provide major tax advantages for most people.
Likewise, ensuring you have a diversified portfolio that limits overall risk could be a shrewd move. Reducing company-specific risk through buying a range of companies, or even investing in tracker funds, could be a means of obtaining smoother returns that are ultimately higher in the long run. This could reduce your dependency on the State Pension and provide greater financial freedom in older age.
While growth may prove to be the key focus in the early part of your retirement savings plan, as retirement moves closer it could be worth switching into higher-yielding assets.
Some stocks in the FTSE 100 and FTSE 250 could provide a generous yield compared to assets such as bonds and cash, while their potential for dividend growth may also mean they offer an inflation-beating passive income during your retirement.
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