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.
This post was originally published on Motley Fool
