No savings? I’d drip feed £500 a month into UK shares to retire in comfort

Worried about retiring with no savings? Zaven Boyrazian explains how investors can aim to boost their wealth for the long term with UK shares.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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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 RetirementPotential 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 RetirementPotential 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 RetirementPotential 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.

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.

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.

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