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Buying quality, cheap shares in an ISA is a proven strategy for building long-term wealth. And even when starting from scratch at the age of 40, investors can drastically improve their retirement prospects… some might even be able to retire early!
Aiming for an earlier retirement
In 2026, the average retirement age in the UK is around 65. But what if someone who’s just turned 40 wants to start enjoying life a bit earlier and aims to retire on their 60th birthday?
Relying solely on the UK State Pension’s not an option. Apart from falling firmly short of the amount needed to have even a basic lifestyle, the minimum eligible age to claim the State Pension is rising to 67. And given the state of public finances, there’s a good chance this threshold will be increased again within the next two decades.
This is where a Stocks and Shares ISA can come to the rescue. By consistently drip feeding money each month into the stock market, investors can build up a pretty chunky nest egg over a 20-year time horizon.
In fact, if a portfolio matches the stock market’s long-term average annual return of 8%, investing £750 a month would transform into a £441,765 retirement portfolio.
But if an investor instead channelled their money exclusively into high-quality shares trading at cheap discounts, the returns could be far more impressive.
For example, at a 12% average annual return, a £750 monthly investment grows into £741,941. That’s over £300,000 more compared to a basic index fund and over £600,000 greater compared to the average British pension pot.
Investing in cheap shares
On paper, investing in top-notch cheap shares sounds easy. In practice, it can be quite a challenge. After all, shares are often cheap for a good reason. And it’s up to investors to weigh the risks against the potential rewards to find market-beating opportunities.
So what are some cheap shares for investors to explore today? One FTSE 100 stock that’s on my radar right now is Diageo (LSE:DGE). The alcoholic beverage brand powerhouse has struggled in recent years with revenue growth stagnating and earnings disintegrating.
As such, Diageo shares have been stuck on a pretty painful downward trajectory since 2022, with over 60% of its market-cap wiped out in the process. But with investor sentiment collapsing, a hidden buying opportunity may have emerged.
Diageo shares are now trading at their lowest point since 2012. Yet with a brand-new turnaround strategy deployed by a brand-new management team, that could be about to change.
Portfolio optimisation efforts, divestments, and accelerated deleveraging plans are already underway as Diageo seeks to shore up its balance sheet and restore its profit margins. And while it’s still early days, snapping up shares at the start of what could be a multi-year recovery rally may lead to exceptional long-term gains.
Obviously, success isn’t guaranteed. But with the market pricing Diageo shares so cheaply, the risk-to-reward ratio looks quite promising, in my eyes. That’s why I think investors aiming for an earlier retirement may want to consider taking a closer look.