Ways to invest in your 40s

It’s never too late to consider investing. Here are a few tips that could help you make the most of your investment journey in your 40s.
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If you’ve had to delay your investment journey until your 40s, don’t worry – you’re there now, and that’s what matters. Better late than never, right?

Now, although there's no limit on when you could start investing, since you'll have less time to do so, you might want to consider the strategies you use to try to make the most of your investment journey. So, here are some things to think about when you invest for the first time in your 40s.

Consider drip feeding your investment plan

If you can afford to invest large lump sums, then feel free to put as much money as you wish in your investment plan as this could help it to grow further over the years. But if you can’t afford to invest large sums, then that’s absolutely fine too, and you could choose to drip feed your plan by regularly investing smaller sums.

This strategy is often referred to as ‘Pound Cost Averaging’ in the investment world, but at Wealthify, we prefer to talk about ‘drip feeding’, which is where you regularly invest small amounts of money. This may not necessarily be obvious, but investing little and often could be a great way to potentially grow your wealth over time.

Let’s take an example to look at. Say, you invest £100 every month. While it may not seem like a lot to put in, after 10 years, your investment pot could potentially grow to £14,0741. And if you wait an extra decade, then you could end up with around £34,5892. Notice how much more powerful the magic of drip feeding could get with time!

So, if you’re ready to commit long-term, then it could be worth setting up a Direct Debit to feed your investment plan – just think of it as investing on autopilot.

Drip feeding isn’t just a way to potentially build your wealth, though – it could also help you ride out market bumps. It's normal for the performance of financial markets to fluctuate, and since you’re starting late, that’s something worth considering as this strategy could help to reduce the impact of market movements on your investments and the total value of your plan.

As we've explained, financial markets have ups and downs, and when they go down, it can be pretty scary. However, it’s important to try and stay calm. If you sell your investments and stop drip feeding your plan, all you’ll be doing is making your losses real  – and you could be missing out on potential growth.

Now, if you remain invested and decide to keep up with the drip feeding, not only could you enjoy some positive growth during better days, you could also take advantage of the lows. This is because when markets fall, investments get cheaper, meaning you could grab some bargains that could potentially see their value rise over the long-term. This is exactly what drip feeding allows you to do – since you’re investing regularly, you might just have the capacity to purchase cheaper shares when the time comes.

Think about reviewing your contributions

You may have avoided the investment arena because of your financial situation in your 20s or 30s, but if your finances are in a better place now, it could be worth reconsidering your contributions.

Obviously, you shouldn’t invest when you can’t afford, but in the long run, it could pay off to try and invest as much as you’re comfortable with. And since you’re still young, your situation could still improve  – and if it does, you may be able to increase your contributions. Even if it’s only an extra £10 a month, this could make a difference over the long-term.

For instance, by investing just £50 a month over 15 years, you could end up with £11,6813. But if you increase your monthly contributions to £60, you could potentially boost this amount to £14,017 after 15 years – that’s an extra £2,336 in your pocket, and you’d have the power of compounding to thank for this4.

Basically, in the world of investing, compounding is your ally as it could help boost your money over time. When you invest in companies, they’ll typically share some of their profits with you by paying dividends. You can either cash in these payments, or you can put these profits back into your investment plan where they could help to generate further profits. And by reinvesting your dividends over a number of years, your investment pot could grow exponentially bigger.

Now, if you drip feed your plan and increase your contributions (when you can), then you could get the power of compounding to potentially work a bit faster.

Choose the right risk level

Investing in your 40s doesn’t necessarily mean you need to act overtly cautious. But it doesn’t mean you’ve got to be extra adventurous either. It’s all about balance and finding the risk level that’s right for you.

How do you do this, you ask? Well, you’ll need to ask yourself the right questions. For example, what are your investment goals? How long will you be investing for? And how comfortable are you with risk?

If you don’t like the idea of your investments having large swings in value as the markets move up and down, then you may look to choose a low-risk investment strategy. However, one thing to note is that by taking less risk to minimise your losses, you could also be limiting your potential for growth. But if you’re less concerned about market movements and are planning on investing for a number of years, then why not consider higher-risk investments like shares?

Whatever your risk appetite is, try to think about diversifying your portfolio as it could help mitigate risk. By spreading your money across a range of investment types and regions, the likelihood of losing everything should decrease.

Try to use your ISA allowance

If you’re investing in your 40s, you'll likely want to try and maximise your potential profits as you'll have less time for your money to potentially grow.

To do this, you could consider opening a Stocks and Shares ISA. A Stocks and Shares ISA lets you invest in a tax-friendly way, so you don’t need to pay tax on any profits you gain, meaning you get to keep more your potential returns – what’s not to love?

Investing in an ISA does come with some rules though. Firstly, you’re only allowed to pay in one Stocks & Shares ISA per tax year. Secondly, the amount you can put each tax year in your ISA is limited to £20,000 – this is your ISA allowance for 2022/23, and although it’s been the same amount since 2017/18, the ISA limit could potentially change in the future.

However, the way you use your allowance is up to you. You can either put everything in your Stocks and Shares ISA, or if you have other types of ISAs, you could split your allowance between a number of different types (though remember, you can only open one of each type of ISA). 

And every year, you’ve got until midnight on the 5th April to use your ISA allowance before it resets. Otherwise, you’ll lose it forever, so you may want to make the most of it before the deadline passes.

And don’t forget about your pension!

If you’re in your 40s and haven’t started planning for your retirement, now could be a great time to get things sorted.

If you’ve been working and earning over £166 a week, you should be able to claim a state pension from the government. To receive any state pension, you’ll need to have at least 10-years’ worth of national insurance contributions, and if you’re aiming to get the full state pension, which is currently set at £9,627.80 a year5, you’ll need to pay contributions for at least 35 years. So, now that you’re in your 40s, it could be wise to check whether you’re on top of your contributions.

The other type of pension you’re entitled to in the UK is your workplace pension (if you have one). If you’re employed by a company, you should be automatically enrolled into one, and contributions should be made by both yourself and your employer. This means that if you've had multiple jobs over the years, then you could have the same amount of workplace pensions lying around.

Typically, you’ll have to contribute at least 5% of your salary, and your employer will top up by paying a minimum of 3% of your pay. If you know you’ve contributed to a workplace pension over the years, it could be worth checking how much you’ve got saved and how it’s been performing.

If you’ve got several pension schemes and don’t know where they are, you might be able to locate them using the HMRC website. You may also want to consider bringing them all into one single scheme. That way it’ll be easier to manage and keep track of your retirement fund.

After having a look at your state and workplace pensions, it could be a good idea to think of ways to boost your retirement pot – after all, you have 28 years or less before retiring. And if you’re looking to have more control over your later life, opening a personal pension could help.

With a personal pension, also known as SIPP (Self-Invested Personal Pension), you can make your own contributions and investment choices. Even better, your investments could grow free from any income and capital gains tax.

And that’s not all! You’ll also receive at least 20% tax relief from the government – this is a little gift to compensate for the income tax you’ve already paid.

Typically, if you’re a basic rate taxpayer, you’ll pay 20% tax on your earnings. In other words, for every £1,000 you earn, you’ll be left with £800. However, if you put this £800 in a personal pension, you’ll get back £200 as tax relief and your pension will be worth £1,000. And if math is your forte, then you’ll probably notice that £200 is effectively 25% of £800, meaning you get a 25% top-up on each contribution you make.

This does come with some rules though. Although you can contribute as much as you want, the amount you’ll get tax relief on is limited to £40,000 a year, or 100% of your earnings (whichever is lower), and this allowance includes the combined contributions made by you and the government. You can make contributions until the age of 75, but you can start taking money out from your 55th birthday (although this is due to change to 57 from April 2028). At this point, you should be able to take 25% of your pension tax-free.

It may be tempting to withdraw money in your late 50s, but remember, the longer you remain invested, the more potential your investments will have and the higher your returns could be.

Investing in your 40s isn’t mission impossible, and it doesn’t even have to be difficult. With digital investment platforms, like Wealthify, the hard work is done for you. Whether you open a Stocks and Shares ISA or a personal pension, our investment team will pick the right mix of investments and manage your Plan on an ongoing basis.

All you need to do is choose your risk level and the amount you’d like to invest – you can start your ISA adventure with as much or as little as you want, and if you want to save for your retirement, you can get started with an initial investment of just £50.

And once you’re invested, you’re in complete control! You’ll be able to check how your investments are performing at anytime, anywhere.

 

1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £11,734. If markets perform better, your return could be £16,825. Values correct as of 27/04/22.

2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £26,537. If markets perform better, your return could be ££45,463. Values correct as of 27/04/22.

3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £9,414. If markets perform better, your return could be £14,593. Values correct as of 27/04/22.

4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £11,297. If markets perform better, your return could be £17,512. Values correct as of 27/04/22.

5: https://www.gov.uk/new-state-pension/what-youll-get

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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