If you are in your 40s, you are in a powerful place. By now, there’s a head full of wisdom sitting on your shoulders and you are still young enough to do almost anything you want with it.
Let me suggest that you turn your attention to building up a nest egg for your retirement, among other things you may want to do. After all, the new full State Pension is a pitiful £175.20 per week right now. And I can’t imagine the government being flush enough to raise its real spending power by the time you retire.
Stressed government finances
In fact, it could go the other way. Perhaps you’ve noticed that the government’s finances are in a vulnerable state right now. The coronavirus crisis has piled on top of the credit-crunch from the noughties. And government borrowing has gone through the roof.
If all that sounds a bit grim, it is. Usually, when governments find themselves in a mess over money, they often aim to inflate their way out of the mammoth debts that pile up. And that’s one thing I’m expecting in the years ahead – inflation. That’s certainly what happened following the credit crunch, for example. I clearly recall my household expenses doubling in short order.
Meanwhile, I’ve got to wait until the age of 67 before collecting my State Pension. Yet, my father got his at 65. You may need to wait longer than me. And it’s possible for the goalposts to move for both of us before we get there. Indeed, there’s a clear trend for the state retirement age to move further away – and stressed government finances will probably only make thing worse.
The case for building a second income in retirement to use alongside your State Pension is stronger than ever. And if you are 40, you’ve got the best part of three decades to build up a nest egg. Even if you are starting from scratch today, that’s enough time if you put your mind to it. Here’s how I’d proceed:
A three-step plan
Firstly, I’d cultivate the savings habit. Saving a regular monthly sum is essential to building wealth over time. You can set up a standing order that takes the money out of your current account before anything else. Treat that savings expense as untouchable. If need be, you can scale down your lifestyle a little to accommodate it.
Secondly, I’d look for ways of making the saved money work hard for me. The key to building wealth is to compound your money by ploughing all the interest and gains back in so that they also earn a return and so on. To me, there’s only one way to go. The stock market has delivered greater returns over time than most other asset classes such as property, bonds, and cash savings. So its shares and share-backed investments all the way for me.
Thirdly, I’d aim to hold my investments in tax-efficient wrappers such as a Self-Invested Personal Pension (SIPP) or a Stocks and Shares ISA.
