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How I’d use £5,000 a year to invest for retirement

Active senior woman with dog on a walk in a beautiful autumn nature.

Retirement can seem a long way off for some people. But no matter how old or young we are, the sooner we start planning for retirement, the longer a timeframe we will have to try and get our finances in good shape. Here is how I would use £5,000 a year to invest for retirement, starting at any age.

1. Invest with a specific goal

The first thing I would do is to set a goal. What exactly do I want? Is it a regular income starting from a certain age? Or perhaps a lump sum for the day on which I stop working?

Different people have their own circumstances and goals. There is no one-size-fits-all approach to planning for retirement. But I think setting a goal is helpful, as one can then make investment decisions based on whether or not they seem likely to help achieve that goal.

2. Balance risk and reward

In my opinion, a lot of success in retirement planning is simply staying the course. In other words, buying shares now that hold and hopefully increase their value across the decades is already more of an achievement than some people realise.

For example, looking back at the initial FTSE 100 index from the 1980s, one finds long-gone names such as MFI Furniture, Britoil and P&O. But just because a company is no longer around in its original form does not mean that shareholders lost out: in some cases, a takeover bid may have bought out existing shareholders. That said, I owned shares in MFI, and it was a dog. It went into administration during the last financial crisis.

Nobody knows what will happen in the future. But when I invest for retirement, my approach is to take a long-term view. I focus on minimising risk rather than targeting growth and accepting higher risk levels.

For example, Imperial Brands and British American Tobacco were both original FTSE 100 members (under slightly different names) and remain so today. I own them in my pension. Although I think their growth prospects are limited, I expect long-term demand for their products. There is a risk that falling cigarette use could hurt revenues, but both firms have previously demonstrated they can stay the course, even in difficult market conditions.

3. Avoid market timing

If I invest £5,000 a year, should I drip feed it on a regular basis, or save it up for the next stock market crash?

On one hand, I do not believe in market timing. Nobody knows when the stock market will crash. Spending year after year with my retirement funds out of the market while I wait for a downturn could lead to me missing some great opportunities.

On the other hand, I aim to buy shares in great companies selling at attractive prices. Sometimes, shares look overvalued to me. For example, I would be happy to invest for retirement by buying shares in Dechra Pharmaceuticals – but not at their current price-to-earnings ratio in the 60s.

So I would not hoard my money for a crash. But I also would not rush to invest it for its own sake. I would take my time and patiently wait for what I think are great opportunities to come my way.

The post How I’d use £5,000 a year to invest for retirement appeared first on The Motley Fool UK.

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C Ruane has positions in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.