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No savings at 40? You could still retire a millionaire

Edward Sheldon, CFA
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Having no savings at 40 is not ideal. However, at that age, it’s also not the end of the world. Assuming a retirement age of 65, you still have 25 years to build up a retirement pot, and if you prioritise saving money now and get that money working for you, you could potentially still amass a decent amount of money for retirement. In fact, play your cards right, and you could still retire with a million pounds or more. 

Start saving 

Of course, if your goal is to amass a £1m portfolio for retirement starting at 40, you will have to save a fair amount of money each month. For example, assuming you can generate an average return of 8% per year on your money (more on this below), you’d need to save a little under £14,000 per year, or £1,167 per month, to hit the magical £1m mark by age 65.

Many people may struggle to save this much money every month. However, before you give up, be aware that there are clever financial strategies that could help you save this kind of money more easily. 

Savings boost

For example, if you saved into a Self-Invested Personal Pension (SIPP), the government would top up your contributions as a reward for saving for retirement. Basic-rate taxpayers receive ‘tax relief’ of 20% when they contribute to a SIPP, while higher-rate taxpayers can claim an additional 20% tax relief. What this means is that if you’re a basic-rate taxpayer, you’d only have to contribute around £934 yourself per month to save £1,167, while if you’re a higher-rate taxpayer, a £1,167 contribution would only cost you around £700 per month. All of a sudden, that million in retirement is looking more achievable.

Get your money working for you

Now, as I said earlier, my calculations are based on the assumption that you can generate a return of 8% per year on your money. So, how do you achieve this?

Well, one thing is for sure and that is you won’t get that kind of return if your money is sitting in cash savings in a SIPP or any other type of account. You’ll be lucky to receive a return of 1% per year. However, if you were to invest your money in a diversified mix of growth assets such as shares and investment funds, an average 8% annual return over the long run is certainly achievable.

For example, one of my favourite investment funds, Fundsmith, has generated an average annual return of around 21% over the last five years. Another fund that I have invested my pension money in, Lindsell Train Global Equity fund, has delivered annualised returns of around 22% over the last five years. Now, past performance is no guarantee of future performance, of course. However, the takeaway is that these kinds of growth assets can really get your money working hard for you.

Save regularly and boost your wealth by investing in growth assets, and a one million pound retirement portfolio is certainly achievable, even if you’re starting at 40. 

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Edward Sheldon has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. 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.

Motley Fool UK 2019