No matter how young (or old) one is, it is never too early to start thinking about pensions. Personally, I think it is important to have proper pension arrangements in place. Buying shares might be part of that (or most of it), but simply owning a stock portfolio before retirement is not the same as pension planning.
Having said that, I do plan to buy FTSE 100 shares in the decades leading up to retirement, hoping to build my wealth.
The FTSE 100 is a collection of the largest companies listed on the London stock market. That does not necessarily mean they are the best companies in the country. In fact, as they are companies with large valuations, they are often mature businesses with fairly modest growth prospects.
But what many FTSE 100 shares do have going for them is an established and proven business model. Consider the five biggest members as an example: AstraZeneca, Shell, HSBC, BP, and Unilever. All have been around in one form or another for decades at least. Four out of five reported post-tax profits in the billions of pounds last year.
Past performance is not necessarily a guide to what will happen next. But I think investing in a carefully chosen, diversified portfolio of proven blue-chip businesses seems like a sensible way to try and build long-term wealth.
But will that on its own be enough to let me retire rich? Answering that question requires three pieces of information. How many years will I be drip feeding money in, how much each year, and what will the rate of return be?
The first two questions are basically questions of fact that depend on my own circumstances. How many years are there before I expect to retire, and what is a reasonable amount of money I could expect to invest annually during that period, based on my personal circumstances? Broadly speaking, the longer my time frame and the larger my contributions, the more I ought to be able to build my wealth.
Power of compounding
But the rate of return depends on a couple of things. Critical among these will be which FTSE 100 shares I choose and how they perform.
Another important factor is whether I compound the dividends. Doing that basically means reinvesting them rather than taking them out as cash while I am still working.
Compounding can be very powerful. Imagine I invest £10,000 in a share with a 5% yield. Imagine too that in the next 30 years, the share price is constant and the dividend is maintained. If I do not compound dividends, after 30 years my investment would still be worth £10,000. But simply by compounding the dividends, after 30 years my investment value would have more than tripled.
If I start early enough (though better late than never!) and drip feed in big enough contributions, I think buying FTSE 100 shares could help me retire rich. Compounding could add extra fuel to my efforts.