Having no savings at 40 isn’t the end of the world, but it’s not ideal. Saving enough to ensure a comfortable retirement is a long-term job, so it makes sense to start early in life.
There are good reasons why someone may have no savings at this age. Incomes have stagnated. The financial crisis and pandemic have added to the squeeze. Young people have other responsibilities, such as paying off debt or saving for a property deposit.
Also, retirement can seem a long way off, in your 20s and early 30s. For many, the urgency starts hitting home around 40. At which point, it should be all systems go.
I’d buy FTSE 100 stocks
Most people are likely to have some savings at 40, though. Especially in future, as the auto-enrolment company pension scheme gives millions a workplace pension for the first time.
I’m in my early 50s now, but if I had no savings at 40, the first thing I would do is sit down and work out how much I’d want in my retirement pot, when I hit State Pension age at 66.
The easy answer is ‘as much as possible’, but I’d try to be more precise. Right now, the full new State Pension pays £9,110 a year. As a rule of thumb, for each £4,000 a year of income above that, I would need £100,000.
So if I wanted £16,000, plus State Pension on top, I would need £400,000 in my pot at 66.
That’s a tough task, starting from scratch with no savings at 40. Not impossible, though. I would start by building a portfolio of top FTSE 100 stocks. Equities can be volatile in the short term, but should beat most asset classes over periods as long as 26 years. If I invested £250 a month and my stock picks generated an average total return of 7% a year, by age 66 I would have just over £220,000.
That isn’t bad, from a standing start at 40, but I’d want more. So I would aim to invest £500 a month instead. That is a lot to find every month. However, saving for retirement is a vital task, and you have to commit yourself. Retirement could be a long, slow haul if you are mostly relying on the State Pension.
How I’d handle having no savings at 40
I would invest all the money I have saved during lockdown, and resist the temptation to splurge when we are released. If I could save more than £500 a month, I would do that. And throw in any lump sums that came to hand.
I also would invest my money tax efficiently, splitting it between a self-invested personal pension (SIPP) and my tax-free Stocks and Shares ISA allowance. I would claim tax relief on my pension contributions, and my ISA holdings would grow free of income tax and capital gains tax.
At retirement, I would draw a passive income from the dividends paid by my FTSE 100 stock picks. These shareholder payouts are not guaranteed, so I wouldn’t know for sure how much income this would generate, but it would be a lot more than if I had no savings at 66.
Having no savings at 40 is a worry, but one I would quickly put right.