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!
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Intuitive Surgical. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023