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Retirement creeps up on many people but the best time to start thinking about it from a financial planning perspective is far in advance. Tucking money away regularly in blue-chip UK shares is a relatively simple but potentially powerful method many people use to try and prepare for their retirement, even if it is decades in the future.
To illustrate, imagine a 39-year-old with not a penny in the stock market today turning a new leaf this week. They set up a regular contribution of £900 each month into a diversified portfolio of carefully chosen UK shares.
If that portfolio compounds at 8% annually, by the time they reach 67 (soon to be the state retirement age), their portfolio will be worth over £1m.
Compounding is a simple but powerful financial force multiplier
In that example, I discussed compounding at 8% annually. Understanding this concept helps when assessing the potential credibility of such an approach.
Here, compounding means the whole portfolio growing at an annual rate of 8% on average each year (some years will be better than others, in reality).
That can be from dividends. It can also be from share price growth. Then again, share price declines would eat into the return – and dividends are never guaranteed.
Contrast two UK shares. British American Tobacco yields 6.2% — and its share price has grown 38% over the past five years. That comfortably hits the 8% target.
By contrast, JD Sports yields just 1.2%. Its share price has fallen 34% in five years. That falls far short of the target.
Past performance is not necessarily a guide to what will happen in future, of course. By choosing the right mixture of UK shares, though, I see an 8% compound annual growth rate as a realistic target.
Looking to the future
One UK share I think investors ought to consider in this context is packaging and janitorial product supplier Bunzl (LSE: BNZL).
The FTSE 100 share yields 3.2% but its share price growth over the past five years has been a measly 2%. Crucially, though, that includes a recent price crash. The Bunzl share price is down 32% since February.
Revenues have been declining over the past couple of years. Net profit last year also fell. The company continues to navigate risks including the impact of tariff disputes on its supply chain and weak demand in some markets.
But while it may not seem like much of a growth play right now, Bunzl’s business model has long been growing through acquisition, offering economies of scale. The wider its product range and international reach, the more compelling Bunzl’s offering should be for its target customer base.
Despite recent wobbles, I think that business model has long-term legs.
Moving from dreaming to action
Putting £900 a month aside is well within the annual ISA allowance. So an investor may want to choose a competitive Stocks and Shares ISA as they try to build wealth. Alternatively they may be eyeing a different investment vehicle for retirement, such as a Self-Invested Personal Pension (SIPP).
Whatever the route, building any wealth will require taking some action — not just dreaming about it.
This story originally appeared on Motley Fool
