Even with no savings in the bank, it’s never too late to start building wealth with UK shares. There’s no denying the stock market can be a volatile place. But in the long run, it’s proven to be one of the greatest enrichment instruments, even for investors that start later in life. Case in point, billionaire investor Warren Buffett made 99% of his wealth after turning 50.
Crunching the numbers
Looking at the UK’s flagship indices, investors have historically earned an average return of about 8% a year. Let’s assume this trend will continue. How much money can investors make by investing £500 a month at this rate before retirement comes knocking?
The answer very much depends on how many years an investor has left before retiring. But when starting from scratch it could be anywhere up to £1.75m.
Years Until Retirement
Potential Portfolio Value (8%)
40
£1,745,504
30
£745,180
20
£294,510
10
£91,473
5
£36,738
For those who’ve just kicked off their career, starting the investing journey early can be immensely rewarding in the long run. And even for those with only a decade left, buying quality UK shares can still make a meaningful difference. Even more so when using a tax-efficient account like a Self-Invested Personal Pension (SIPP), which provides tax relief.
As a quick demonstration: someone in the Basic rate income tax bracket could receive up to 20% tax relief. And when compounded in the long run, that boosts the potential portfolio value significantly.
Years Until Retirement
Potential SIPP Portfolio Value (8%)
40
£2,181,880
30
£931,475
20
£368,138
10
£114,341
5
£45,923
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.
Boosting returns even higher
Instead of mimicking the market average with a low-cost index fund, investors can target higher returns by picking individual stocks. Adopting this investment strategy comes with notably higher risk. It demands far more discipline and knowledge to make informed decisions and avoid pitfalls. After all, a badly built custom portfolio can just as easily destroy wealth instead of creating it.
The challenge is hunting down the UK shares that can deliver market-beating returns in the long run. It’s not an easy task, but the London Stock Exchange is filled with examples to study from. Take Ashtead Group (LSE:AHT) as a prime example.
The equipment rental business was one of the first businesses to recognise shifting preferences within the construction industry. By strategically placing itself as a go-to solution for builders, it quickly captured the lion’s portion of market share in the UK before beginning to replicate its success in the US. The end result was an average 18% annualised return since 1999. And 25 years of compounding £500 each month in a SIPP translates into a £3.6m pension pot.
Ashtead’s tremendous success stems from its first-mover advantage and the cultivation of sticky customer relationships. And it’s a trait that many industry leaders have today. So spotting these advantageous characteristics early can help investors identify winning stocks early on.
Years Until Retirement
Potential SIPP Portfolio Value (10%)
40
£3,952,550
30
£1,412,805
20
£474,606
10
£128,028
5
£48,398
Of course, Ashtead’s 18% annualised return’s pretty exceptional and borders on Buffett-like returns. It may not continue. Nevertheless, even by earning only an extra 2% over the market average, investors can significantly bolster their retirement wealth.
The post No savings? I’d drip feed £500 a month into UK shares to retire in comfort appeared first on The Motley Fool UK.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
More reading
2 UK stocks that could rise if Harris wins the Presidential election
US election? 1 top FTSE 100 share I’d buy no matter how the stock market reacts
I’d aim for a million buying less than 15% of the FTSE 100!
Small SIPP at 55? I’d take these steps to boost my retirement savings
It grew 342% in 1.5 years! Is this FTSE 100 stock ready to relive the good old days?
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Ashtead Group Plc. 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.
