Having no savings aged 50 may mean retiring early seems to be an unlikely event. After all, it takes time to build a retirement nest egg that can produce a passive income in older age.
However, with the State Pension age set to rise to 67 within the next decade, retiring early may mean that a 50 year-old still has a 10-15 year time period in which to invest for their retirement.
With that in mind, here are three steps I’d take today to increase your chances of retiring comfortably early.
Invest in the stock market
While saving for retirement is never an easy process, the stock market can help boost the size of your nest egg. The FTSE 100, for example, has recorded an annualised total return of around 9% since its inception nearly 36 years ago. Certainly, it’s experienced periods of huge disappointment, such as during the dot com crisis and the credit crunch. However, holding a range of large-cap shares over a long time period could make a significant difference to your retirement plans.
For example, investing £1,000 today in the FTSE 100 at an annualised return of 9% could lead to a portfolio value of over £3,600 in 15 years. As such, investing as much as you can in the FTSE 100 could improve your chances of retiring early.
While tax may not be at the forefront of most people’s minds when investing for retirement, it can lead to major differences in your financial outlook. For example, at the present time every individual has a £2,000 annual dividend allowance. Any dividends received in excess of this level are taxed.
For anyone who’s seeking to make a passive income in older age to supplement their State Pension, investing through a tax-efficient product such as a Stocks and Shares ISA could therefore become increasingly important.
An ISA is easy to open, simple to manage and very cost-effective. Buying shares through it, rather than in a bog-standard sharedealing account, could make a significant impact on the size of your retirement nest egg. This may lead to a higher annual net income in older age.
Reinvest through downturns
Over a 10-15 year time period, there’s likely to be a major recession or bear market at some point. As successful investors such as Warren Buffett have repeatedly shown, continuing to buy shares during such periods can prove to be a good idea. It means you’re able to buy high-quality businesses while they trade at low prices. This can improve the risk/reward ratio of your portfolio, and lead to higher returns.
Since the FTSE 100 currently faces a number of risks that have depressed the prices of many of its members over recent months, now could be a good time to start investing for your retirement.
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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.