Having no retirement savings at age 40 doesn’t necessarily mean you’ll be reliant on the State Pension to fund your outgoings in older age. However, it does mean that starting to plan for retirement sooner rather than later could be a good idea.
Of course, where you invest your hard-earned cash can make a significant difference to your standard of living in older age. Here’s why it may be a shrewd move to avoid cash savings and buy a range of FTSE 100 shares for the long term instead.
Having some cash is always a good idea. It provides peace of mind, as well as the capacity to pay for unexpected events such as repair bills. However, relying on cash savings to provide a return which can improve your retirement prospects may lead to significant disappointment.
Currently, cash savings accounts offer an annual interest rate of around 1.25%. Therefore, in most cases, they may struggle to offer a positive after-inflation return over the coming years. This could lead to reduced spending power in older age.
Looking ahead, cash savings accounts may not experience a significant improvement in their returns. Inflation is currently low, while the prospects for the UK economy are uncertain. This may convince the Bank of England to maintain low interest rates, or even move to lower them, which could be bad news for savers.
FTSE 100 prospects
While cash savings may fail to produce strong returns in the coming years, the FTSE 100 could have a positive impact on your retirement prospects. It currently trades at a relatively appealing price level, since risks such as Brexit, political uncertainty in the US and coronavirus have impacted negatively on investor sentiment in 2020.
This could provide buying opportunities for investors who have a long time horizon. The track record of the index shows it has always recovered from its downturns to produce high single-digit annual returns. And, with many of its members currently offering higher yields than their historic averages and lower valuations than they have done in the recent past, now could be the right time to start building a portfolio of FTSE 100 stocks.
A simple process
The process for buying FTSE 100 shares isn’t especially complex, nor is it expensive. Opening a tax-efficient account, such as a Stocks and Shares ISA, takes less than 10 minutes online in most cases, while buying shares is a simple process which is now more accessible to a wider range of investors, due to falling commission costs over recent years.
As such, starting to invest for your retirement could be an easier process than you’d previously imagined. And, through buying and holding FTSE 100 shares, you may be able to generate significantly higher returns than from cash savings, which improves your prospects of enjoying financial freedom in older age.
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.