Retirement can often seem a long time off. Plenty of people are so busy working that for many years they do not really think seriously about their retirement – or how they can fund it. But the longer the timeframe one has to invest for retirement, the more one can hopefully benefit from the sort of long-term value compounding that can be achieved by great shares.
That is why if I was 35, rather than putting off thinking about it for decades, I would start investing for my post-working years. By starting early I would not require a huge amount of money. I estimate £35 per week, which works out at just £5 per day.
Little and often
It may seem difficult to imagine that £5 a day can add up to the foundation of a well-funded retirement. But think about it for a moment — I have £35 a week, and there are 52 weeks in a year. So that simple £5 a day adds up to over £1,800 in one year – or close to £20,000 across a decade. Starting at 35, I would have well over three decades to improve my financial position prior to retirement.
But simply putting money aside is only the first step. I would then use it by buying shares.
I would drip feed money into a share-dealing account or Stocks and Shares ISA over time and investing it in a range of high-quality shares. Hopefully I could therefore benefit not only from regular saving but also from the investment returns I might earn by putting that cash to work in the stock market.
Choosing shares to buy
My plan can work in a couple of ways. One is capital growth. For example, I may decide that the market for robotic surgery will grow and invest in a stock like Intuitive Surgical, a leader in that field. If its sales and profits keep growing, hopefully its share price could do too.
Or I might focus on income and invest in a share like Direct Line, with its 9.6% dividend yield. By compounding the dividends (reinvesting them in more shares), I may see my pension pot snowball.
Alternatively, instead of focusing purely on growth or income, I could do what many investors do and try to incorporate both styles as I go along.
Aiming for value
Finding shares that apparently offer me growth or income opportunities is not necessarily difficult. But in the long term, my returns will be heavily influenced by what I pay for them. So as well as trying to buy shares in quality companies, I would also focus on buying them at an attractive price.
Intuitive Surgical, for example, trades on a price-to-earnings ratio of over 70. While I like its business growth prospects, I feel they are already more than reflected in its share price. So I would not buy the shares for my pension right now.
Instead, I would keep putting aside £35 a week but invest it only when I found what I thought were great businesses with a compelling share price. That way, hopefully, my retirement fund could grow pleasingly in the decades between now and when I stop working. To make that happen, though, I’d make a start — today!
