Having no retirement savings at age 40 is likely to become increasingly commonplace. A high cost of living and rising house prices mean that putting money aside each month for retirement is likely to prove challenging for most people.
However, starting to plan for retirement as soon as possible could be a worthwhile move. At age 40, you still have around 27 years until the State Pension starts being paid. In that time, investing modest amounts each month in the FTSE 100 could produce a second income in older age that complements your State Pension and helps to improve your financial freedom in retirement.
For example, investing £200 per month in the FTSE 100 between age 40 and when the State Pension starts being paid amounts to a total investment of £64,800. Investing that amount over a 27-year time period in the FTSE 100, which has historically recorded an annualised total return of 9%, could produce a nest egg which totals £246,000 by the age of 67.
With the FTSE 100 currently having a dividend yield of 4.4%, that nest egg could realistically offer an annual passive income of around £10,800, thereby boosting your annual income so that you are less reliant on the State Pension.
Clearly, the more you invest and the longer your time period, the greater the potential for a larger pot at the end. However, the example shows that even investing a realistic amount each month on a regular basis can lead to a retirement stash that provides a worthwhile passive income in older age.
Starting to invest in the FTSE 100 is an easier process than many people realise. A good starting point is a FTSE 100 index tracker fund, since it provides a low-cost means of obtaining diversification across a wide range of companies.
Opening a Stocks and Shares ISA, which is a tax-efficient share-dealing account, and buying units in a tracker fund are likely to take a matter of minutes to complete online. And with the cost of doing so being exceptionally low, they are likely to be accessible to almost all investors.
Beating the index
Of course, as your portfolio increases in size, you may wish to buy individual shares that have favourable risk/reward ratios alongside your FTSE 100 index tracker fund. This could enable you to beat the market’s returns through, for example, purchasing high-quality stocks while they trade on low valuations. At the present time, there appear to be a number of such stocks in the FTSE 100, which could make starting to invest today an even better idea.
Clearly, it will take a long time to build a retirement portfolio. However, at age 40 you are likely to have sufficient time to do so, with the FTSE 100 likely to make that task easier than it otherwise would be.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.