With the cost of housing exceptionally high compared to incomes, it’s likely to become increasingly common for an individual to have no retirement savings by the age of 40. After all, paying for a home as well as other life events can mean that planning for retirement is not always a priority.
While this may seem to be a challenging situation, the reality is there may still be time to generate a sizeable nest egg for retirement.
Financial products
Perhaps the most obvious place to start planning for retirement is to decide on the financial product(s) which will be used. A stocks and shares ISA is a relatively simple means of planning for retirement, since any amounts paid into it have already been taxed. There is therefore no further tax to pay, and this could make it simpler for an individual to know how much capital they have available for retirement.
Alternatively, a SIPP could be a worth considering. Amounts paid into it aren’t subject to income tax, which means it may grow at a faster pace than an ISA. Although 25% of withdrawals are tax-free, the remainder is taxed at an individual’s normal tax rate. It’s also not possible to make withdrawals until aged 55, which reduces flexibility compared to an ISA. For some individuals, though, being unable to withdraw capital before retirement may prove to be helpful, since there’s no temptation to spend the money in the meantime.
Whether a SIPP, stocks and shares ISA, or another pension-related product is used, finding the best fit given personal circumstances could be a sound move. It may reduce tax paid and make it easier to build that retirement nest egg.
Investment
Clearly, the more money that’s invested in a pension, the higher it’s likely to become by the time an individual retires. However, it may not be possible to invest large sums due to slow wage growth, or a high level of expenses. Even so, it’s possible to put in place a relatively sizeable amount within a 25-year time period, assuming returns from the stock market are the same as they have been in the past.
For example, the FTSE 250 has recorded an annualised total return of around 9.5% over the last 20 years. Assuming £150 is invested per month (which works out at less than £5 per day) over the 25-year period, the same level of returns could lead to a sum of £165,000 by the age of 65. Assuming an investor withdraws 4% of their capital each year in retirement, this could lead to an annual income of £6,600 per year. Given that the State Pension is £8,546 per year, it represents a significant improvement on a retiree’s annual income.
As mentioned, the more that’s invested, the higher the nest egg and annual income could be. However, just because no retirement savings are in place by the age of 40 doesn’t mean that an individual will be unable to enjoy financial freedom in retirement. Through investing in a diverse range of shares, it’s possible to generate a surprisingly large retirement nest egg.
