If you have no savings at 40, don’t despair, you still have enough time to build the money you need to get rich and retire early. However, you need to start saving, right away. Don’t rely on a windfall or inheritance, but draw up a plan of action now.
If you have kept your job in the pandemic, you are in a good position. Your income will have held up while share prices will be cheaper. A stock market crash is a great time to start investing in shares as you can find bargains everywhere. If you’ve got no savings at 40, make sure that is no longer the case at 41.
Some investors will be wary about paying a large sum into the stock market in case we get a second stock market crash. If that bothers you, spread your risk by investing a series of lump sums. Nobody knows where share prices will go next, so do not spend too much effort trying to time the market. Hunt for good buying opportunities and when you see one, snap it up.
No savings at 40? Act now
I would also recommend setting up a regular monthly payment into a Stocks and Shares ISA that you pay into whatever happens to stock markets. That is a great way to build your wealth, because after a while, you will not even notice the money leaving your account.
An ISA is a great way to save for the future, because all your income and capital gains will be entirely free of tax for the rest of your life. You can pay in up to £20,000 a year. If you invest £500 a month, that will work out as £6,000 a year in total. So you could invest more in an ISA, if you can afford it.
If you have no savings at 40, the more you can put away right now, the better. I would recommend starting with blue-chip FTSE 100 stocks, then as your confidence grows, check out medium-sized companies in the FTSE 250 or even small-caps.
Retire rich, retire early
Let’s say you invest £500 a month and the stock market grows at an average rate of 7% a year, with dividends reinvested. The state pension age is now 66, and by that age you would have the grand sum of £440,902. Not bad given that you had no savings at 40. Whether you can afford to retire for good on that amount will depend on personal factors, such as your lifestyle, and whether you have any workplace or personal pensions, too.
If you withdrew 4% of your £440,902 as income each year, known as the safe withdrawal rate, and left the rest invested, you would have £17,636 a year to live on. The state pension could add another £9,000, in today’s terms. You no longer have to fear retirement.
You will be in an even better position if you increase your ISA contributions, year after year. If you upped them by 3% a year, you would have £585,947 to retire on, assuming average growth a 7% a year. If you have no savings at 40, make sure that isn’t the case at 66.
The post No savings at 40? I’d drip-feed £500 a month into a Stocks and Shares ISA to build wealth appeared first on The Motley Fool UK.
Harvey Jones 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.
Motley Fool UK 2020