Warren Buffett is 90 years old and shows no sign of slowing down in his approach to investing. He has been making money from stocks almost his entire life, but I think he would agree that getting started in my 40s is not too late. And with the FTSE 100 tipped to rally into 2021, this could be a great time to discover the lucrative world of long-term investing.
Investing in my 40s
At 40+ years old it may seem too late to invest, but I don’t believe it is. It’s true that time and patience are the most important assets a long-term investor can strive for, but at 40, we’re not even halfway through an average lifetime. With retirement age rising and the likelihood of at least another 30 years of working life ahead, that leaves loads of scope for building a substantial retirement nest egg.
While it’s great to invest before hitting the big Four-Oh, for many people it’s just not practical. The cost of living can leave little extra for saving. Then there’s getting on the housing ladder, and if we throw children into the mix, finding extra cash to set aside can seem an impossible dream. But for many, once the shock of turning 40 has worn off, the financial burden often gets easier.
Many 40-somethings find themselves settled. The career ladder has been sufficiently climbed, all the big outlays accounted for and the prospect of a pay rise or promotion on the table. This can be the point at which investing doesn’t seem so inconceivable.
Investing £250 a month
Warren Buffett’s advice is to invest regularly, buying stocks to hold for many years. The benefit to this is gaining capital growth through share price progression. If dividends are earned and then reinvested, then this can create compound interest, which exponentially builds wealth.
As an example, if I can afford to invest £250 a month, with an effective annual rate of 5.5%, then after 40 years I’ll have a considerable sum of over £421,926.
If I increase the effective annual rate to 9%, I’ll achieve one million pounds in the same time frame. I realise that makes me over 80 years old, which doesn’t give me much time to enjoy it, but it leaves a nice nest egg to my dependents.
Alternatively, if I bring the time frame down, then in 30 years at 9% I’d achieve £428,595. That would be a very respectable sum to start my retirement at 70.
How much should I have saved up at 40?
I don’t even need to have anything already saved at 40. The key is to drip-feed cash regularly. Although £250 is a good sum, it could be less or more. I think anything is better than nothing and even a monthly investment of £50, could build over time to a decent reserve.
The FTSE 100 contains the UK’s largest stocks, by market capitalisation. It’s often deemed the safest place to invest when buying UK stocks. While all investments carry risk, we expect most FTSE 100 companies to stand for years to come. This makes it a good place for beginners to invest in their 40s.
2020 has been a stressful time for financial markets globally. If the vaccine comes to pass and we finally put Brexit behind us, then some analysts believe it sets the FTSE 100 for a 2021 rally. I think Warren Buffett would agree, this presents a great opportunity for investors.
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.