With the State Pension eligibility age rising to 66 this month and a regular age increase on the cards for the foreseeable future, striving to retire early is increasingly appealing. However, to achieve this dream, an income stream is vital.
None of us can live on fresh air alone. And unless you’re the beneficiary of a small fortune, you must take control of your own future finances. One way to retire early is through investing in an ISA, or Self-Invested Personal Pension (SIPP).
Retire early as an ISA millionaire
If you put £500 a month into an ISA (or SIPP) from the age of 30 then, at an annual interest rate of 10%, you’ll make over £1m before you’re 60. Considering you’re unlikely to be eligible for a State Pension until you’re at least 70, that gives you a nice nest egg to begin your retirement years early.
However, if you reach 60, love your job and feel fit enough to continue working, you can continue enjoying the benefits of compound interest and build that sum even further.
Many ordinary individuals have become ISA millionaires. It’s not an unachievable suggestion as people think. By taking the first steps and buying shares you like, it can quickly become a lucrative venture and viable path to early retirement.
With interest rates at an all-time low, achieving 10% a year may seem impossible. But studies have shown long-term investors can make an average return of between 8% and 10% per year. While past performance cannot guarantee future performance, it makes a good guide. Billionaire investors Warren Buffett and Terry Smith have both followed a value investing strategy and achieved excellent annual returns.
Researching cheap UK shares
It also depends on which stocks you invest in. Investing in individual stocks can bring much higher rewards, but also carry additional risk, a key factor to take into account if you’re looking to retire early. Whereas, investing straight across a broad index, such as the FTSE 100, is safer. But it’ll take longer to achieve your £1m. According to IG, between 1984 and 2019, the FTSE 100 gave investors an annual price return of 5.8% and an annual total return of 7.8%.
Cheap UK shares may tempt you. But buying because they’re cheap is never a good idea. You need to ask yourself why they’re cheap, and will they go up in value? For instance, IAG shares are cheap because of Covid-19. Will they recover? Possibly. But I think they’re a risky buy because there’s no end to the pandemic in sight. So IAG’s share price could get worse before it gets better. Plus, it doesn’t offer a dividend.
Investing in dividend-paying stocks is the fastest way to capitalise on compound interest to build greater returns for those who want to retire early. If you’re serious about learning to invest for the long term, you need to put in the research necessary to understand the stocks you’re buying.
Getting into the habit of reading company trading updates can be a useful way to gauge how the company will perform in the future. If a trading update shows a company has been doing well and appears to have further room for growth, this is a sign its share price could continue to do well too.
So, if you’d like to retire early, investing monthly could be your answer. Many UK shares are cheap and The Motley Fool’s experts can help you on your investing journey.
Kirsteen 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.