Having no savings at 50 isn’t ideal! This is because the earlier you start saving for retirement, the more you benefit from compounding your returns.
Nevertheless, at 50, you still have nearly 20 years to retirement. Assuming you have an income, it’s possible to build a substantial nest egg over such a period, and retire rich.
Every year counts, if you have no savings at 50
My first tip is to start saving immediately. If you have no savings at 50, make sure you don’t still have no savings at 51! The sooner you start building your retirement fund the better. Every year counts towards increasing your financial freedom in older age.
For example, at a 5% annual return, £10k would grow to £16.3k over 10 years, but £26.6k over 20 years. As I say, start saving immediately. Don’t put it off until next year, or some vague time in the future.
Every penny counts
My second tip is to save as much as you possibly can. Just as every year counts towards increasing your financial freedom in older age, so does every penny saved.
Economise wherever possible. Most of us can reduce or cut out some areas of our discretionary spending without a noticeable deterioration to our lifestyle. Once you’ve worked out how much you can save a month, treat it like any other necessary expense, such as a mortgage payment or water bill. If your income rises, prioritise increasing your saving over your spending.
Cash savings
If you’re beginning to save from a standing start at 50, cash savings accounts won’t significantly compound your money over the timeframe to retirement. You’ll be lucky to earn a real (after-inflation) 1% annual return.
Such a return would grow £10k into just £12.2k over 20 years, compared with the £26.6k at a 5% return I mentioned earlier. There’s a reason I chose that 5% return. It’s the take-off for my third tip to retire rich, if you have no savings at your half century.
Stock market investment
The average long-term real return from the UK stock market has been around 5% a year. Over short periods, the market can have quite dramatic downswings, as we’re seeing at the present time. However, it’s always recovered and gone on to new heights, producing that average 5%-a-year return over multiple decades. So, my third tip is to regularly invest your savings in the stock market.
There are low-cost stock market tracker funds that mirror the returns of the major UK stock indexes. Namely, the FTSE 100, FTSE 250 and FTSE All-Share. Now, a 5% return may enable you to reach your retirement goal. This will depend on what your goal is, and how much you’re able to save. But what if a 5% return isn’t high enough to achieve your objective?
A 10% annual return over 20 years would turn £10k into £67.3k (compared with £26.6k at 5%). It’s possible to achieve 10% annual growth by buying shares in a carefully chosen selection of individual companies.
Your best chance of success is to learn about how businesses work, how effective they are at making profits, and how they’re valued by the market. And you’ll find plenty of insights into all these things, and more, here at the Motley Fool.