The age at which we will receive our state pension seems to keep increasing. An ageing population and increasing life expectancies have lead to difficulties in funding the UK State Pension. As it is funded from current tax receipts, it relies on a plentiful and productive working population. When the ratio between the working population and the retired population widens, the financial burden grows.
For most of the past 100 years, the retirement age for men was 65 and for women was 60. Over the past 25 years or so, several changes were made. In addition to increasing the State Pension age, the year in which it is due to start keeps getting brought forward.
State Pension delays
Currently, the retirement age for both men and women is due to be 68 by no later than 2046. With these trends continuing, I wouldn’t be surprised if those in their 20s and 30s eventually see a State Pension age of 75.
That’s a long time to wait for retirement. I’m planning to retire at 55, long before I’m due to receive my State Pension. If you would rather retire early too, then I would consider investing in quality UK shares.
I believe the following three steps can help build an investment pot that could fund your early retirement.
Start as early as possible
History shows that the longer you invest for, the longer you have to compound your returns. Albert Einstein is reputed to have said, “compound interest is the eighth wonder of the world”. It’s true. Consider a 25-year-old investing £246 per month into a Stocks and Shares ISA, and achieving the long-term average return of 7% per year. By the age of 55, the investor would have built an investment pot of £300,000. Had the investor waited until the age of 35 to start investing, the total pot would have grown to £128,148 instead. So start investing early.
Invest in a basket of quality UK shares
By holding a diversified portfolio of stocks, you can limit risk. I would suggest a portfolio of around 15 to 20 stocks, but not just any stocks. Consider investing in good quality companies that you think will survive and still be thriving over the coming decades. Alternatively, there are several diversified funds and investment trusts that might be more suitable for a more hands-off approach. Although these funds are likely to already be reasonably diversified, I suggest holding several to limit management risk.
Keep investing regularly
Setting up a regular monthly direct debit into a Stocks and Shares ISA has several benefits. It allows you to stick to a plan and not spend the money elsewhere. It also helps you to undertake a process referred to as dollar cost averaging or pound cost averaging. As stock markets move up and down in cycles, investing a fixed amount every month will automatically purchase stocks in down-cycles and recessions. This will let you take advantage of buying at lower prices and offset any higher prices you may have paid during up markets.
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Harshil Patel 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.