Having no retirement savings at age 50 can cause a degree of stress and worry. However, it’s never too late to start planning for retirement. Certainly, investing over a longer period of time can allow compounding to boost your returns to a greater degree. But with over a decade until you are likely to retire, there is still time to improve your prospects of retiring in comfort.
With that in mind, here are three simple steps that could boost your long-term financial prospects. Starting them today could increase your chances of building a worthwhile retirement nest egg from which to draw a passive income.
The growth potential of the stock market means that investing even modest amounts on a regular basis can add up to a surprisingly large nest egg in the long run. The stock market has historically delivered an annualised return which is in the high-single digits. As such, it appears to offer a substantially higher return outlook than other popular assets, such as savings accounts.
Therefore, while living within your means is a worthwhile step to take to generate capital which can be used for retirement planning, investing that capital in the stock market could be equally as important. It has the potential to double in value every nine years (assuming an annualised return of 8%), and could therefore help to boost your retirement portfolio to a greater extent than other asset classes.
The track record of the stock market shows that, over the long run, the market generally moves higher. Certainly, there are periods of decline. But they have only ever lasted for relatively short time periods. As such, over a 15+ year time period, it is likely that you will generate profits along the way.
It can be tempting to bank those profits and spend the money on a variety of items. However, this may harm your chances of retiring in comfort. Not only does it reduce the value of your portfolio, it means that compounding will not have as great an impact on your returns as would have been the case if profits had been reinvested.
With a 15+ year time horizon, compounding could have a significant impact on your retirement portfolio’s valuation. As such, reinvesting your profits and dividends could be a means of improving your level of passive income in older age.
Dividend growth stocks
Investing in dividend growth stocks could prove to be a sound idea. They may become increasingly popular among investors in an era where low interest rates look set to remain in place. Furthermore, buying shares that could offer strong dividend growth may lead to a generous passive income in your retirement – especially if they have a long time period in which to improve on their present-day yield.
Identifying shares which can pay a higher dividend means checking factors such as the dividend coverage ratio, which is calculated by dividing net profit by dividends, to provide guidance on the affordability of shareholder payouts. Management may also provide an insight into whether they plan to pay a higher dividend in future. Focusing your capital on companies that could raise dividends may lead to a relatively attractive income stream in your retirement.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.