How I can start to invest for retirement with just £500

Jon Smith outlines how much £500 could be worth in a few decades’ time if he starts to invest for retirement in a smart way right now.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I sometimes see adverts talking about how to deploy nest eggs and retirement pots of a million pounds or more. This can be very overwhelming for those in younger generations that haven’t started to invest for retirement.

If that’s the case, here’s how I’d go about starting to build a self-invested retirement pot with just £500.

Understanding compounding

On the face of it, £500 now doesn’t seem like a huge amount of money to enjoy down the line. Yet this doesn’t take into account the impact of compounding.

Compounding is the process by which money increases in value not just from the initial amount by also from the accumulated gains.

For example, let’s say I bought a stock with £500 and it doubled in value. My £500 would now be worth £1,000. Now if in the following year the stock doubled again, I wouldn’t make £500, but rather £1,000. My investment would now be worth £2,000. The added benefit shows how compounding can be of use over time.

So even if I just invest £500 today and leave it for decades to come, I’d be pleasantly surprised at how much it could be worth. For example, let’s say I’m 30 and plan to retire at 65. If I assume an annual growth rate of 8%, my £500 would be worth £8,146 by the time I retire!

Where to put my money

The amount of risk I’d take on with my money depends on many factors. I’d say the biggest one is age. If I’m wanting to invest for retirement in my 30’s, I can afford to be more aggressive and target high-growth stocks.

Over the long term, this should provide me with the largest potential gains. Even if we have a stock market crash over this period, my investment horizon is so long that I’d be happy to sit and wait for the market to recover.

However, if I’m 60 and only have a few years before I want to access the money, I’d probably go for dividend stocks and mature shares with low volatility. The aim here switches more to capital preservation with some income.

Building more than just £500

Even though £500 is great to begin with, my aim would be to invest regularly in the future to increase my overall pot size. Putting away some funds each month also gives me the benefit of diversifying my portfolio.

If I can own a dozen stocks with £500 in each, I’ll have a much smoother ride than if everything was just in one company.

I have to be aware of some of the risks that I’ll face along the way. A big assumption is what annual return I could achieve. I can plan using a set figure, but the risk is that my actual return is lower.

Another factor is inflation. This erodes the value of my money, especially when it’s out of control. Turning £500 into £8,146 sounds great, but what will the real value be of that money after factoring in inflation?

My aim is to invest the £500 in high-growth stocks, and add to this pot each month to build a robust portfolio.

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 assessed. Consider taking independent financial advice.

Jon Smith 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.

More on Investing For Beginners

Investing Articles

2 no-brainer beginner FTSE 100 stocks to buy for my portfolio

Getting started with investing can be daunting. Here are two stocks for beginners to consider buying to build their first…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Bill Ackman made $610m last year from 10 growth shares. Here’s how

Jon Smith details the growth shares, including Chipotle and Alphabet, that helped push a whopper payday for the Pershing Square…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Don’t know where to start investing? I follow the Warren Buffett method

Our writer highlights the different ways in which Warren Buffett has inspired him to try to build significant stock market…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

I’d start investing with just £40 today

Our author uses his own financial journey as a way to explain how he'd start investing if he had just…

Read more »

Investing Articles

With no savings at 30, I’d use Warren Buffett’s golden rule to build wealth

Many investors look to Warren Buffett -- the Oracle of Omaha -- for investing guidance. Here's how he could held…

Read more »

Mature people enjoying time together during road trip
Investing Articles

How I’d build a robust beginner portfolio using just FTSE shares and £5k

Zaven Boyrazian explores how he’d invest £5k to build a new portfolio of FTSE shares in 2024 for both long-term…

Read more »

Investing Articles

£500 spare? Here’s how I’d start investing today

This Fool lays out the methods he'd use to start investing in the stock market with just £500. He also…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 compelling FTSE ‘starter’ stocks I’d invest in

These two FTSE stocks might be the first I'd buy if I were to start investing from scratch. Here's why…

Read more »