No savings at 40? You could still retire a millionaire

Here’s how to build up £1m for retirement, starting at age 40.

Edward Sheldon, CFA

Based in London, Edward is a freelance investment writer/analyst who has clients all over the world. Prior to launching his own investment writing business in 2017, he spent 15 years working in private wealth management and institutional asset management, both in the UK and in Australia. Edward is a passionate investor himself and manages his own global equity portfolio. This contains a mix of large-cap growth stocks, large-cap dividend stocks, and small-cap growth stocks. His stock-picking strategy combines ‘growth’, ‘quality’, and ‘thematic’ approaches. Edward holds a Commerce degree from the University of Melbourne, as well as the Investment Management Certificate (IMC) and the Chartered Financial Analyst (CFA) qualification. You can find him on Twitter @EdwardSheldon7

Published 6 October, 2019 1:04 pm BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Having no savings at 40 is not ideal. However, at that age, it’s also not the end of the world. Assuming a retirement age of 65, you still have 25 years to build up a retirement pot, and if you prioritise saving money now and get that money working for you, you could potentially still amass a decent amount of money for retirement. In fact, play your cards right, and you could still retire with a million pounds or more.

Start saving

Of course, if your goal is to amass a £1m portfolio for retirement starting at 40, you will have to save a fair amount of money each month. For example, assuming you can generate an average return of 8% per year on your money (more on this below), you’d need to save a little under £14,000 per year, or £1,167 per month, to hit the magical £1m mark by age 65.

Many people may struggle to save this much money every month. However, before you give up, be aware that there are clever financial strategies that could help you save this kind of money more easily.

Savings boost

For example, if you saved into a Self-Invested Personal Pension (SIPP), the government would top up your contributions as a reward for saving for retirement. Basic-rate taxpayers receive ‘tax relief’ of 20% when they contribute to a SIPP, while higher-rate taxpayers can claim an additional 20% tax relief. What this means is that if you’re a basic-rate taxpayer, you’d only have to contribute around £934 yourself per month to save £1,167, while if you’re a higher-rate taxpayer, a £1,167 contribution would only cost you around £700 per month. All of a sudden, that million in retirement is looking more achievable.

Get your money working for you

Now, as I said earlier, my calculations are based on the assumption that you can generate a return of 8% per year on your money. So, how do you achieve this?

Well, one thing is for sure and that is you won’t get that kind of return if your money is sitting in cash savings in a SIPP or any other type of account. You’ll be lucky to receive a return of 1% per year. However, if you were to invest your money in a diversified mix of growth assets such as shares and investment funds, an average 8% annual return over the long run is certainly achievable.

For example, one of my favourite investment funds, Fundsmith, has generated an average annual return of around 21% over the last five years. Another fund that I have invested my pension money in, Lindsell Train Global Equity fund, has delivered annualised returns of around 22% over the last five years. Now, past performance is no guarantee of future performance, of course. However, the takeaway is that these kinds of growth assets can really get your money working hard for you.

Save regularly and boost your wealth by investing in growth assets, and a one million pound retirement portfolio is certainly achievable, even if you’re starting at 40.