Most people can identify with the dream of one day becoming a millionaire, but it would also be fair to say that for many of us the chances of ever achieving this dream seem a remote and distant possibility.
Unfortunately, the feeling that this is an impossible target quite often means we pin our hopes on unlikely solutions such as playing the lottery, or, perhaps more commonly we simply accept being a millionaire is more than likely just a pipe dream. If you are willing to invest sufficiently over the long term, however, the £1m target might be more within reach than you think.
There are, of course, various high risk investment strategies you could consider, but the greater likelihood is that you will never achieve this goal via a “quick and easy” route and in reality will probably end up worse off than before you started. Trying to spot the next great investment opportunity or trying to perfectly time the markets is difficult enough for even the most successful investment manager, never mind ordinary investors, and is always very high risk. Building a £1m fund is possible, however, with two basic ingredients: sufficient time and an appetite to take some degree of investment risk.
Let’s consider an example. To maximise tax efficiency and to target state pension age, we will assume an individual contributes to an ISA starting at age 36 (retirement age will be 68) and that they are then able to contribute the maximum amount of £11,520 per year. (This is the maximum allowance for the 2013-2014 tax year for stock and shares ISAs).
The maximum annual ISA allowance will likely increase over time to keep pace with inflation, but for the sake of argument we’ll assume that contributions stay constant over time at £11,520 per year. If you diligently keep up those annual subscriptions, you will need to achieve an average return of 5.7% (after charges) per year in order to end up with an ISA worth more than £1m after 32 years. Total contributions in this time would have been £368,640.
This demonstrates the potential impact of consistent contributions and assumes realistically achievable growth rates. Of course, it must be said that if the growth rate in our example was significantly lower – let’s say a deposit rate of 2% (after tax) – this would mean it would take 51 years to break the £1m mark. Total contributions in this time would also have been £587,520. It may be that you feel that it is either too late to or simply unaffordable to start making these level of contributions but it is still worth considering the potential fund that could be built if saving for a child using the new junior ISA limits.
Let’s assume a Junior ISA is started at birth and you are able to contribute the maximum amount of £3,720 per year (This is the maximum allowance for the 2013-2014 tax year for Junior ISAs). This maximum level will likely increase over time to keep pace with inflation, but again for the sake of argument we’ll assume that contributions stay constant over time at £3,720 per year. Assuming the same 5.7% growth after charges, then they could have a fund at age 18 of over £118,125 which is quite a decent pot to cover university costs with hopefully some left over as a welcome contribution to a house deposit. If this is left for another 50 years and no further contributions are made, assuming the same level of growth then the pot could be worth over £1.88m – a reasonable return for an investment of £66,960 and the perfect example of compound growth. As with any such examples this is assuming growth and contributions will be consistent and as the world of investing has shown us over the past decade or so, this is not as predictable but is a good example of what can be achieved with appropriate long term planning and some commitment.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
The value of your investments can fall as well as rise and investors may not get back the full amount originally invested
Past performance is not a guide to future performance. Equity investments do not include the same security of capital which is afforded with a cash account.