Nowadays it’s normal to reach 40 years of age and realise you’ve no savings and are more than likely saddled with debt in the form of a mortgage or car loan. You may have children to pay for and what seem like endless living costs. How can you possibly start thinking about retirement, let alone early retirement? Well, the good news is, you can, because even at 40, it’s not too late to plan your future wealth and aim to retire early.
Boost your State Pension It’s now well known that the State Pension is not enough to live on comfortably, so planning to supplement it with an additional income stream is a wise move. One such way is through dividend income, which you can achieve by regularly investing in a long-term portfolio through a Stocks and Shares ISA or Self-invested Personal Pension (SIPP).
Either of these is a great way to introduce you to investing, and with time you can build a substantial nest egg. You can invest a maximum of £20k a year in a Stocks and Shares ISA and it’s free from tax, even on any gains. A SIPP works in a similar way but you can pay in 100% of your annual earnings before tax, up to a limit of £40k for 2020–21. If you don’t work, you can contribute up to £3,600. A SIPP also offers tax relief so it can be a great way to save enough to retire early. As it’s tailored to be your pension, you can’t withdraw from it until you’re 55.
How do I invest for a comfortable retirement? If you know little about investing, the easiest way to start is by buying funds. This is arguably the least risky way to invest in the stock market. Rather than buying shares of individual businesses, you buy a fund which contains several. These funds can cover sectors, financial indexes, or specific types of investment.
If you’re slightly more confident in your investing strategy, you can buy shares in individual companies and store them in your ISA or SIPP. Through these investment vehicles you can also invest in unit trusts, exchange-traded funds (ETFs), investment trusts, government or corporate bonds, cash and even commercial property.
Follow Warren Buffett’s lead Billionaire investor Warren Buffett has accumulated billions of dollars over the years through the power of compound investing. This is when his investment accrues interest and the interest accrues interest, rapidly compounding the initial sum. The best way to achieve this is with dividends. Some stocks offer dividends, which act like interest and can be reinvested, creating the compounding effect.
Another of Buffett’s tips is “Invest in what you know“, which means choosing companies or funds you understand, so you can have confidence in your actions.
By investing £500 a month for 20 years, at an effective annual rate of 12.68%, you’ll end up with £505,020 when you’re 60. If you’re not looking to retire early and would rather contribute a lesser amount, £250 a month for 30 years will create a sum of £891,465 when you’re 70. Varying the period of investment, the interest rate, and the amount invested will all affect your final sum. It sounds daunting, but it’s not, and the rewards can be considerable. So don’t put it off. Follow Warren Buffett’s advice and start your investing journey today. Your future self will thank you!
The post No savings at 40? Following Warren Buffett’s tips could still help you retire early appeared first on The Motley Fool UK.
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Motley Fool UK 2020