I’d invest £250 a month in UK shares in an ISA to retire early

There are some bargain UK shares to be had right now and you can smooth current stock market volatility by investing a regular monthly sum in an ISA.

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After the latest leg of the stock market crash, UK shares are even cheaper than they were. This gives long-term investors an exciting buying opportunity, but some will be wary. Share prices could fall further, over the weeks ahead. Especially if we get a second lockdown.

So how do you respond? History shows that stock markets always recover, if you give them time. So I’m planning to take advantage of today’s attractive prices, by investing the odd lump sum when I have money to spare. At the same time, I am also investing a regular monthly amount, which will buy UK shares regardless of what happens to stock markets in the weeks ahead.

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A simple way of doing this is to set up a Stocks and Shares ISA. All your returns are free of tax, and they are cheap and easy to manage. If you pay in a regular monthly sum year after year, you could build a generous nest egg over time. It could even help you retire early, if that’s what you want to do. It’s always nice to have the choice.

The FTSE 100 looks cheap after the stock market crash

UK shares have had a tough year, thanks to Covid-19. In fact, they have underperformed global stock markets since the EU referendum. The FTSE 100 is heavily exposed to both the big banks and big oil companies, both of which have been hit hard by the pandemic.

This means UK shares are look relatively cheap. Investing is cyclical, which means this opportunity may not last long. If we sort out Brexit and get a coronavirus vaccine, the UK economy may soon find itself in a stronger position than it is now.

Of course, that could take time. You may not want to chance a lump sum today. Or maybe you do not have the capital to spare. That’s why I like to invest monthly. After setting up a regular monthly payment, you scarcely notice the money leaving your account. Instead, you budget around it. The money rolls up without you noticing, especially if you reinvest your dividends for growth.

I’m building my retirement on UK shares

Let’s say you have 30 years until retirement. If you invested £250 a month in UK shares, and they returned an average 7% a year, with dividends reinvested, you would have £303,219. If you withdrew 4% as income after you stopped (known as the safe withdrawal rate because your pot should never run dry), you could generate £12,000 a year.

The new state pension is worth £9,110 a year, assuming you get the full amount. Combined, this could give you income of more than £20,000 a year in retirement. That’s on top of any workplace pension you may have.

If you want more than that, you will have to pay in more than £250 a month, either that or invest for longer. The sooner you start, the better. Especially since UK shares are so cheap right now.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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