If you’ve reached the grand old age of 40 or more with no savings, I think high-yield, cheap FTSE 100 shares are your key to a comfortable retirement.
It was about age 35 for me when I woke up one day and realised I’d spent almost every penny I’d ever earned.
Clearly, my best years were still ahead of me. But without ramping up my savings, I could be facing a retirement of stressful penny-pinching. I’d rather be golfing, treating my grandkids, and thrashing a high-end Lotus down the autobahn, personally.
A Cash ISA? Not a good option. At today’s rates of around 1% return per year it doesn’t even cover inflation. I’d basically end up with less money than I put in! But cheap FTSE 100 shares that yield large dividends? Now there’s a compound interest idea I can get behind.
Where to start
I’ve committed now to saving £500 a month. That’ll get me to £10,000 in two years, on my 40th birthday. Let’s say I buy a 7% yielder like BP. These are certainly cheap FTSE 100 shares. In fact BP is less expensive now that it has been at any point in the last 25 years.
I get 7% a year on top of my £10,000. So, each year the company sends me a free £700 for me to use on whatever I want. Some people might withdraw that cash as income and use it to pay bills. This is useful for retirees who don’t have regular money coming in.
But if I reinvest the dividends? This is where the magic really starts to happen.
How much you make
In year one you have your original stake of £10,000.
In year two, you can buy more FTSE 100 shares with that free £700 the company sent you. So you get £10,700 of company shares (your original stake plus the reinvested dividend amount) for just £10,000.
This is what we mean by ‘compound’ rather than ‘simple’ interest. The 7% is added to your new figure of £10,700 rather than your original £10,000 stake.
The following year you will receive 7% on top of your £10,700 amount: an extra £749. So inside 24 months your buying power for these cheap FTSE 100 shares has jumped from £10,000 to £11,449.
Of course, should you add any more of your own money on top of your original £10,000, you’ll see your wealth really start to fly.
Cheap FTSE 100 shares win
The age at which people can claim their State Pension in 2020 is 66. This is set to rise to 67 between 2026 and 2028, and to 68 between 2044 and 2046.
So if you’re in your 40s today, you likely won’t be able to retire until you are 68. But extrapolate the dividend yield numbers for another 28 years?
By year seven, the £700 annual dividend from your 7%-yielding FTSE 100 shares has morphed into £1,004.26. Your original £10,000 stake is worth £15,350.77.
By year 11, you’ve doubled your money and your original £10,000 is worth £20,121.72.
And by the time you retire? When Covid-19 is something they teach in school history classes?
In year 28, your £10,000 original stake will buy you an incredible £63,560.81.
And this is just from a single set of cheap FTSE 100 shares. Perhaps now you realise why dividend investing is so popular.
I’m not saying sticking to the plan is easy. This is where most people invested in FTSE 100 shares fail. But if you can sit on your hands and watch the cash roll in? That’s a happier retirement, guaranteed.
TomRodgers 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.