I’ve found that 40 is a milestone age that you’ll either embrace or that will send you running for cover. Whichever position reflects you, it’s likely that saving for retirement isn’t far from your mind, particularly if you’re aiming for an early retirement.
Retirement age in the UK is being extended to 67 and there have been some headlines stating the future could be even grimmer with 75 even being suggested as a possible target. This would a drastic leap, considering 50 or 55 was the norm for early retirement only a few years ago.
If you’re healthy, in a career you enjoy, with security until retirement age, then this might not seem such a worry, but very few people are in that fortunate position. Hardly anyone has job security anymore and even though we’re living longer, it doesn’t come without health issues.
So preparation for the elusive early retirement is an increasingly difficult obstacle. At 89 and still working hard, Warren Buffett may not seem like the best person to dole out advice on this matter. Nevertheless, his investing strategies and guidance impart wisdom that can apply to anyone building a financial portfolio to meet early retirement goals.
Warren Buffett’s wise words
- Start now: 40 is not too old to save for retirement.
- Save consistently: Small regular payments are better than no payments and can make a significant difference.
- Find value: Look for a stock considered undervalued. The price-to-earnings ratio (P/E) can be a good indicator, it used to be that under 10 was the bright spot, but in today’s economic climate it’s trickier to find a P/E below 10 without issues.
- Avoid risk: Choose ‘safe’ stocks, long-established companies with a good track record of growth and dividend payments.
- Focus on income: Dividends are the secret sauce for retirement savings. Dividends are cash paid back to shareholders and when reinvested, they compound the amount you’re saving, which can quickly increase the value of your nest egg. A yield of around 5% is great. Anything above that is even better, but watch for pitfalls. Also, check the dividend cover: if it’s too low, then the dividend could be at risk of a cut. A yield below 5% is better than nothing but can show the company is still in a growth phase or marking its profits for other use.
- Diversify: Once you’ve built up a fund of more than £2,000, I think it’s time to diversify. This means buying stocks in a selection of sectors to reduce risk to your portfolio. For example, if you first buy a pharma stock, opt to buy in another sector such as tech, defence or consumer goods next.
- Believe in the company: Think like a company owner, not a trader. Then you’re more likely to buy into a company with good prospects, that you believe in.
I think an ISA is the best place for beginners to buy shares and you can currently save up to £20,000 per year in an ISA tax-free. It’s easy to set one up at an online broker such as Hargreaves Lansdown, Interactive Investor orAJ Bell.
It’s never too late to build a financial portfolio of shares. Take heed of Warren Buffett’s sage advice and I don’t think you can go too far wrong. Embrace being 40 and start preparing for the early retirement you dream of.
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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.