Starting to plan for retirement at age 40 could produce a generous nest egg in older age. After all, the retirement age is set to rise to 67 over the next decade, which leaves a 40-year-old with 27 years left until their State Pension commences.
But even when you get it, the State Pension is unlikely to be sufficient to provide financial freedom in older age. Therefore, following these three simple steps could help you to build a nest egg from which a passive income can be paid.
Invest within your means
While living within your means is a worthwhile move that can improve your chances of retiring early, holding that money in a savings account or a Cash ISA can be detrimental to your retirement plans. Put simply, cash returns are exceptionally low at the present time, being below inflation in the vast majority of cases. This means that over a 27-year time period, your spending power would decline and leave you with a smaller nest egg in real terms.
Investing in the stock market, by contrast, offers significantly higher returns. The FTSE 250, for example, has returned 9% per annum over the last 20 years when dividends are included. Therefore, while it may experience an uncertain period which includes lower growth in the near term, over a long time horizon it could make a positive impact on your retirement plans.
Access undervalued stocks
While some investors may be content buying a tracker fund and obtaining the market rate of return, buying undervalued stocks could be a worthwhile move. This strategy has been successful for investors such as Warren Buffett, with him seeking to buy the best quality companies he can find for a relatively low price.
Sometimes this strategy may require patience. After all, a company’s shares are unlikely to trade at an attractive price unless there are risks to its near-term prospects. However, through buying stocks when the outlook for the wider economy is uncertain, it may be possible to capitalise on the cyclicality of the stock market. This may produce higher returns in the long run that lead to a larger retirement nest egg.
Focus on growth areas
A period of nearly three decades until retirement at age 67 is a long time. The world economy is likely to be somewhat different to what it is today. By focusing on potential growth trends, it may be possible to capitalise on strong tailwinds in some industries.
For example, the healthcare sector appears to have a bright future. An ageing world population could lead to higher demand for a range of healthcare products and services over the next few decades. Likewise, technological change seems to be moving at a rapid rate, which may provide growth opportunities for a number of tech stocks.
Although it may not be possible to accurately predict the future, identifying growth trends and investing in them could improve your retirement portfolio’s performance in the long run.