£17,800 in savings? I’d buy UK shares to try and retire early

Can our writer retire early, even if just by a year or two, thanks to putting some money into UK shares now? He hopes so — here’s how!

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Putting money to work while you still work can be a smart way to try and retire early. One approach a lot of people use to build retirement income is to invest in carefully selected blue-chip UK shares.

If I had a spare £17,800 now, or in coming years, here is how I would invest it to try and retire early, even if just by a year or two.

Setting up a share-dealing account               

My first move would be to set up a share-dealing account, Stocks and Shares ISA or SIPP (Self-Invested Personal Pension) I could use to put the money in and buy shares.

Then I would start looking for UK shares to buy. To reduce my risk if one company does worse than I expect, I would diversify across different businesses. With £17,800, I could comfortably invest in five to 10 different shares.  

Ways to grow my money

How might I try to grow the value of the funds I invest, helping me to retire early? The growth would either come from share prices moving up, dividends, or a combination of the two.

Imagine that I could grow my portfolio at a compound annual rate of 8% without putting in another penny after my initial £17,800.

After 25 years, I would then have a portfolio worth almost £122,000. That ought to help me bring my retirement forward. If I invested it at that point in shares yielding 8%, for example, I would hopefully be earning almost £10,000 annually in dividends.

Finding shares to buy

How realistic is a compound annual gain of 8%? At the moment, there are quite a few FTSE 100 companies offering that yield annually, even though the average index yield is less than half that. But dividends are never guaranteed, so when buying an income share I always focus on whether I think the shareholder payout can last.

An example of such a share I would happily buy now if I had spare cash to invest is financial services giant Legal & General (LSE: LGEN).

The firm yields 9% and has raised its dividend most years over the past two decades and recently laid out a plan to keep doing so.

Admittedly, it expects an annual increase of 5% this year to fall to 2% from next year. Nonetheless, the prospective yield is higher than the current one – if Legal & General can deliver on its plan.

With a strong brand, large customer base and plan to reorganise itself to drive cost efficiencies, I am hopeful that Legal & General can keep raising its dividend.

But it has cut it before. I see a risk that, if financial markets enter a very rocky period, investors might pull out funds, leading to lower profits for Legal & General.

Looking ahead to retirement

Still, I hope shares like Legal & General could help me compound my savings in decades to come. If I invest in the right UK shares and, as a group, the overall performance is strong, hopefully I could generate enough value to give me the option to retire early.

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.

C Ruane 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.

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