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No savings at 40? I’d buy FTSE 100 dividend stocks in an ISA to retire on a passive income

Having no savings at age 40 doesn’t mean a passive income in retirement is beyond your reach. After all, there are still likely to be 25+ years left until you retire. During this time, you could build a generous retirement portfolio.

One way of improving your chances of obtaining a worthwhile passive income in retirement is to invest in FTSE 100 shares. They currently appear to offer good value for money in many cases, and could produce significantly higher returns than other assets, such as bonds, cash and property.

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When purchased through a Stocks and Shares ISA, FTSE 100 companies could offer an even more impressive return due to an ISA’s tax efficiency. As such, now could be the right time to start investing for your retirement.

Return prospects

Buying dividend shares may not appear to be the right move for someone who’s aiming to build a retirement portfolio over a 25+ year period. However, the track record of the FTSE 100 shows a large proportion of its total returns have historically derived from the reinvestment of dividends. As such, focusing your capital on higher-yielding shares, which have the potential to raise dividends at a fast pace over the coming years, could prove to be a shrewd move.

In addition, the FTSE 100 seems to offer good value for money at the present time. It has a yield of 4.4%, which is above its long-term average, while sectors such as retail, resources and financial services continue to be unpopular among investors. As such, the companies operating within them may offer wide margins of safety which ultimately enable them to produce impressive returns in the long run.

Relative appeal

Of course, it may be tempting to invest in assets such as cash, bonds and property. Historically, they’ve produced favourable returns in many cases. However, their outlooks appear to be less impressive than those of the FTSE 100.

For example, low interest rates could persist in the coming years due to the risks associated with Brexit and a low rate of inflation. This may mean that obtaining a positive after-inflation return from cash and bonds is a tough task. Likewise, tax changes and question marks about the affordability of housing may mean buy-to-let investments become less attractive in terms of their return prospects.

Investing today

Therefore, now could be the right time to start buying FTSE 100 shares through a tax-efficient account such as a Stocks and Shares ISA. It’s simple and cheap to open, and may improve your long-term returns.

Even starting to invest with modest sums of money can lead to surprisingly large amounts in the long run. As such, even if you only have a small amount of spare cash available each month, gradually buying large-cap shares and allowing compounding to boost your returns could improve your retirement prospects.

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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.