Having no savings at age 50 does not mean that retiring on a generous passive income is impossible. It is, however, a good idea to start investing for retirement as soon as possible, since it allows compounding to have an even greater impact on your nest egg.
Furthermore, focusing on the long-term growth potential of assets, rather than their short-term prospects, could be a shrewd move. It may allow you to capitalise on the cyclicality of assets such as shares.
Additionally, through diversifying your retirement portfolio in a range of growth areas, you may be able to obtain a more attractive risk/reward ratio that leads to a higher chance of enjoying financial freedom in older age.
The impact of compounding on a retirement portfolio should not be underestimated. It can cause a modest initial investment to become a surprisingly large amount in the long run. For example, an annual return of 8% may not sound especially attractive at first glance. But over the course of a 20-year time period it can produce a total return of 366% on an initial investment.
As such, starting to invest in shares as early as possible could be a good idea. Historically, major indices such as the FTSE 100 and S&P 500 have recorded annual returns in the high-single digits. Therefore, buying a range of large-cap stocks could enable you to obtain substantial returns by the time you retire. They can then be used to generate a larger passive income in retirement than would be the case by waiting any longer than age 50 to start investing.
It’s easy to focus on the short-term prospects for the stock market, rather than its long-term potential. After all, risks such as a global trade war and political uncertainty in Europe can cause wild swings in the valuations of share prices over a short time period.
However, focusing on the long run could enable you to capitalise on the cyclicality of the stock market. In other words, by considering risks facing the stock market as being only temporary in nature, it may be possible to buy high-quality shares at discounted prices. In the long run, they are very likely to produce a successful recovery which could lead to higher returns for your portfolio.
Diverse exposure to growth opportunities
Reducing risk and increasing the growth potential of your portfolio could be possible through buying a range of stocks that operate in different sectors and geographies. They may provide you with exposure to economies, such as those in the emerging world, that offer superior growth rates compared to developed markets. At the same time, having a broad range of stocks can reduce company-specific risk and help to avoid geopolitical challenges that may be focused on a specific region.
The end result could be higher returns that are more sustainable. This may boost your retirement portfolio and help you to enjoy a growing passive income in older age.
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