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It’s never too late to begin searching for shares to buy to build wealth. Thanks to the long-term growth potential of the stock market, even those beginning their investing journey late can target a large passive income for retirement.
Here’s how a 50-year-old with no savings and investments could create a healthy retirement pot by State Pension age.
A £23.5k second income
Investing earlier on significantly increases an individual’s chances of generating retirement riches. This is because of the snowball effect of compounding — the longer someone stays in the market, the more gains they make on previous gains, growing their wealth exponentially.
So someone starting late may wish to use the Self-Invested Personal Pension (SIPP) to give their portfolio a boost. Users of this financial product receive tax relief of 20% to 45%, giving them more financial firepower to invest.
These tax efficient products protect individuals from capital gains and dividend taxes, giving an individual even more capital to invest.
Looking at how this could work in practice, let’s say Neil is a 50-year-old who’s just opened a SIPP. He has £500 of his own money to invest each month, is a higher-rate taxpayer with an annual salary of £53,000, and plans to retire when he reaches the State Pension age of 67.
With that £500 a month, Neil receives an extra £200 in tax relief, giving him a total of £700. If he can achieve an average 9% return on this, he’d have a total portfolio of £335,243 after 17 years.
That would then provide an annual passive income of £23,467, if invested in 7%-yielding dividend shares.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
3 of my SIPP stocks
Of course, I must point out that a 9% annual return is far higher than an investor could expect by just holding cash in their SIPP. But it’s also higher than some share investors achieve — returns aren’t guaranteed, unlike with cash savings accounts. Yet through a mixture of individual stock selection and diversification with trusts and funds, I think it’s possible to achieve this goal.
Take Games Workshop and Ashtead Group, for instance. These are two very different businesses I hold in my own personal pension — one makes tabletop gaming products, while the other rents out heavy plant and other equipment.
Games Workshop shares have delivered an average annual returns of 40.5% since 2015. For Ashtead, this stands at 19.5%.
I’ve also bought several exchange-traded funds (ETFs) like the iShares S&P 500 Information Technology Sector (LSE:IITU) fund. This particular one’s delivered an excellent 23.2% average annual return since its foundation in November 2015. It’s also delivered these strong gains with far less concentration risk than picking individual stocks.
On the downside, this ETF’s focus on highly cyclical technology shares leaves it exposed to cyclical downturns. In total, it holds shares in 68 companies like software developers, semiconductor makers and hardware manufacturers.
However, it also has considerable long-term growth potential as our lives become increasingly digitalised. Holdings like Nvidia, Microsoft, Apple and Palantir are market leaders with strong records of innovation. And they provide exposure to red-hot growth areas like artificial intelligence (AI), robotics, cybersecurity, and cloud and quantum computing.
