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No savings at 50? I’d take these 3 simple steps to generate a passive income in retirement

Peter Stephens
Active senior woman with dog on a walk in a beautiful autumn nature.

It’s never too late to start planning for retirement. Therefore, even if you have no retirement savings at age 50, it is still possible to enjoy financial freedom in older age.

By focusing your capital on growth assets, you may be able to generate impressive returns. Likewise, selecting the most favourable companies and buying them through a tax-efficient account could improve your financial prospects.

Asset allocation

While many people use savings accounts and Cash ISAs to build a retirement nest egg, they may not be all that productive. In other words, the returns they offer could prove to be relatively low in many cases and may not help to bring retirement any closer.

For example, obtaining an inflation-beating income return on cash is extremely difficult at the present time. This means that any savings you build in the meantime are losing their spending power. This may mean that you need to save more to enjoy a generous passive income in retirement.

As such, at age 50 it may be prudent to focus your capital on riskier assets such as shares. They offer higher long-term returns that may produce a larger nest egg from which a more generous passive income can be drawn in retirement.

Quality stocks

Of course, with there being a wide range of companies to choose from it can be difficult to decide where to invest in the stock market. One potential strategy is to focus on the quality of the companies being purchased. For example, buying stocks that have solid balance sheets, strong cash flow and which have a wide economic moat. They may be less risky than their peers, and may offer higher long-term returns.

Buying quality stocks at low prices is a strategy favoured by highly successful investors such as Warren Buffett. While it may not be possible to realise his level of success, his simple investment strategy can be emulated by other investors to provide an improved retirement outlook.

Tax efficiency

While reducing your tax bill may not be a priority in the short run, it can make a real difference to your passive income potential in older age. For example, the dividend tax allowance stands at just £2,000 per annum. Therefore, investing through a bog-standard share-dealing account may eventually lead to a relatively high tax bill in retirement.

One solution to this potential problem is to invest through a tax-efficient account such as a Stocks and Shares ISA. No tax is payable on any amounts invested through it, while it is simple and cheap to open online. Therefore, now could be the right time to start investing in high-quality stocks through an ISA. It could lead to surprisingly large returns in the long run that provide the opportunity for you to enjoy a generous passive income in older age.

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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