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No savings at 40? I’d invest £250 per month in an ISA to retire on a passive income

There’s still time at age 40 to build a retirement nest egg which can provide a passive income in older age. One means of doing so is to open a Stocks and Shares ISA today, and invest in a range of FTSE 100 and FTSE 250 companies that could produce high returns in the long run.

In many cases, those companies trade on low valuations at the present time, owing to uncertainties facing the world economy. As such, they could offer favourable risk/reward ratios which enable an investment of £250 per month to become a surprisingly large nest egg in the long run.

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Investment potential

Starting to invest in shares today could be a good idea for anyone who has no retirement savings at 40. The sooner you start to invest, the longer the time period there is for compounding to positively impact on your portfolio returns.

For example, investing £250 per month over a 25-year time period could lead to a nest egg which is valued at over £250,000 by the time you retire. This assumes an annual total return of 9%, which is in line with the FTSE 100’s returns since its inception, and is below the FTSE 250’s 11% annual total returns since its inception.

From this nest egg, you may be able to generate a passive income of over £10,000 per annum through focusing on income shares. At the present time, the FTSE 100 has a yield of over 4%, which means that it may be possible to obtain an even higher income return from purchasing those companies that have higher yields than the index.

Potential threats

Of course, risks such as coronavirus, geopolitical challenges in the Middle East and political uncertainty in the US and Europe may put many people off investing today. They may determine  it’s a better idea to wait for calmer economic conditions.

However, the stock market continually faces numerous risks which could prompt a bear market. It’s therefore difficult to accurately predict whether share prices will rise or fall over a short time period.

The track record of the stock market, though, shows that it has always recovered from its challenging periods. Therefore, it’s likely to deliver a successful turnaround and post positive total returns even if you buy shortly before a challenging period for the FTSE 100 and FTSE 250.

And, as a large number of low valuations at the present time show, in many cases the risks facing the stock market may have been factored in by investors. This could mean that buying while risks appear to be high is an effective strategy to maximise your long-term gains. It could enable you to build a generous nest egg which provides a passive income in older age – even from a standing start at age 40.

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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.