According to my research, the best cash ISA interest rate available on the market at the moment is around 1.5%.
While this might look attractive compared to the interest rates available on most current and savings accounts, the reality is an interest rate of just 1.5% per annum isn’t enough to ensure that you have a comfortable retirement.
Indeed, with inflation running at 2.1% today, an interest rate of 1.5% means that your money is actually losing value after adjusting for inflation. This means that rather than helping you achieve your goal of being able to retire rich, investing in a cash ISA could be hindering your progress as you will need to save more money to offset the low interest rate and beat inflation.
With this being the case, if you want to retire rich, I highly recommend dumping the cash ISA and buying the FTSE 100 today.
Inflation protection
The main reason why I think the FTSE 100 is a better place to invest your money than a cash ISA is because it offers significantly better returns.
At the time of writing, the UK’s leading blue-chip index supports a dividend yield of approximately 4.7%, more than 200% higher than the highest cash ISA interest rate available on the market at the moment. After adjusting for inflation of 2% per annum, the FTSE 100 offers an inflation-adjusted yield of 2.7%.
And, unlike the cash ISA, the FTSE 100 also offers the potential for capital growth. Over the past decade, the index has returned around 8% per annum. Around two-thirds of this return is from income and the rest capital growth. This return compares extremely favourably to the 1.5% per annum return available from the cash ISA.
Less risk
You might be reading this thinking: “I like the prospect of higher returns, but I don’t want to risk losing my money.”
While it’s true that investing in the stock market does come with more risk than holding cash, over the long term, the chances of losing money in a well-diversified index such as the FTSE 100 are virtually zero. In my opinion, a cash ISA presents much more risk to your wealth because your savings will be eroded by inflation over time.
Number crunching
It’s all very well saying that the FTSE 100 is a much better investment than a cash ISA, but without the figures to prove it, this statement is worthless. So, what do the numbers say?
Well, if you want to retire with a pension pot of half a million pounds 50 years from now, assuming an annual interest rate of 1.5% and an inflation rate of 2%, you would need to save £1,550 a month, or £18,600 a year, to meet this goal, according to my number crunching.
A similar monthly investment in the FTSE 100 would be worth more than £4.5m after five decades of saving, assuming an average annual return of 8% and an inflation rate of 2%. To hit the £500,000 target, a monthly contribution of just £200 would be required, my numbers show.
The figures don’t lie. If you want to retire rich, it seems the best solution is to dump your cash ISA and buy the FTSE 100 today.
