Having no retirement savings at age 40 could become an increasingly common occurrence. The high cost of living and a lack of affordability buying a house may mean it’s difficult to save for retirement.
While it’s always better to start planning for retirement as early as possible as, that way, compounding can catalyse your nest egg, it really is never too late to start the process. Here are three simple steps that could be worth taking today and that may improve your chances of enjoying a comfortable retirement.
When planning for retirement, many people simply open a savings account and build a balance within it. While this is a good first step to take, it may not be as productive as investing in the stock market. Shares have historically offered a significantly higher return than cash. This is very evident at present, with the interest rates on savings accounts less than inflation and the FTSE 100 having gained around 12% in 2019.
As such, it may be prudent to build up a savings balance for emergency costs, such as car and house repairs. This may, for example, be equivalent to six months of your net income. Amounts saved above that level, however, would be better off invested in the stock market, I believe. The FTSE 100’s annualised total returns of 9% since its inception in 1984 suggest that shares could boost your overall returns and help you to build a surprisingly large retirement nest egg.
When investing in the stock market, it’s a good idea to do so tax efficiently as well. This means investing through a SIPP or a Stocks and Shares ISA is a sound move, since they offer greater tax benefits than bog-standard, online share-dealing accounts.
Over the long run, those tax benefits can really add up. For example, currently you’re only able to earn £2,000 in dividends per year without paying dividend tax. As such, if you intend to use your retirement portfolio to generate a passive income in older age, investing tax-efficiently from the very start may be a highly beneficial move.
It’s easy to panic at age 40 when you consider you’ve no retirement savings. However, there’s still time to generate a sizeable pot from which to earn a passive income.
Therefore, it makes sense to adopt a long-term view of your investments. Should they fail to generate high returns in a matter of months, for example, adopting a patient attitude to their performance may be the best course of action. The track record of the stock market shows that it’s very cyclical, and its returns are not uniform.
Over the long run, though, it has the potential to generate high returns that may improve your prospects of enjoying financial freedom in 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.