While retirement planning may not be the most pressing concern for many 20-year-olds, spending even a limited amount of time considering your financial future could be a highly worthwhile move.
Of course, it is always easy with hindsight to look back and consider specific actions that could have produced a larger nest egg in retirement.
For example, not worrying about the short-term losses that shares can deliver, but instead focusing on their long-term growth prospects could lead to rising wealth over an individual’s lifetime.
Similarly, focusing on tax-efficient accounts and not paying too much attention to challenging trading conditions in the short term could lead to higher returns in the long run.
By following these three actions, I think that anyone can improve their long-term financial situation. Doing so could increase your chances of retiring early with a generous passive income.
Short term vs long term
Many people are cautious when it comes to investing their hard-earned cash. This is understandable, since nobody ever wants to lose money. However, the fear of not losing money can lead many people to take too few risks when they have a long-term horizon.
This may be why Cash ISAs continue to be more popular than Stocks and Shares ISAs. While the former does not risk capital, it can cause a loss of spending power over the long run due to its income return currently being lower than inflation. By contrast, investing in the stock market can produce significant returns that enhance an individual’s wealth in the long run.
As such, for people who are decades away from retirement, taking some risk through having a diverse portfolio of shares could be a good idea.
Tax efficiency
With the capital gains tax allowance being £12,000 per year, many younger investors may think that they are unlikely to ever need to worry about it. However, even modest sums invested regularly in the stock market can produce a surprisingly large nest egg. Over time, there is a good chance that many investors will end up paying capital gains tax at some point in their lifetime.
As such, focusing on tax-efficient accounts such as ISAs and SIPPs could prove to be a sound move. They are relatively low cost, simple to open and could save you significant sums of money in unnecessary taxes over the long run.
Ignoring the hype
The stock market is often surrounded by a degree of noise which can affect an investor’s thought process. For example, during recessions many investors may become increasingly nervous due to concerns raised by a variety of commentators. This may dissuade them from buying shares, since they may be waiting for a more settled investment landscape.
This, though, could prevent them from buying high-quality stocks at bargain prices. History has shown that bear markets are followed by bull markets just as day follows night. Therefore, not worrying about the short-term impacts of a recession, but instead capitalising on the opportunities for investment that it brings, could be a sound move for anyone looking to build their wealth over the long run.
