Investing is a great leveller. You don’t need a background in the City, great contacts or any financial qualifications to become a millionaire retiree. You simply need to make a few smart moves. Here are three of them.
1. SIPP it
As much as we love the standard Stocks and Shares ISA at the Fool UK, we’re just as positive about another tax-efficient account — the Self Invested Personal Pension (or SIPP). As its name would suggest, this savings vehicle is ideal for those whose goal is to build a big nest egg for their golden years.
The great thing about the Self-Invested Personal Pension (SIPP) over the ISA is that it forces you to focus on the long term by preventing you from accessing your money until the age of 55 (rising to 57 from 2028). An ISA, on the other hand, can be raided at whim, which isn’t really conducive to generating wealth for retirement.
Another benefit of the SIPP over the standard ISA is that the government pays tax relief on any contributions you make. Pay in £800, for example, and you’ll receive an extra £200 to invest (assuming you’re a basic rate taxpayer). You can also pay in double the amount you can into an ISA (up to £40,000), although be aware that this allowance may change in the future.
2. Make time your friend
If you want to make it to millionaire status, you need to make the most of what Einstein supposedly labelled the eighth wonder of the world: compound growth (or interest on interest).
To give you an idea of just how impressive compound growth is, £58,000 will, after 10 years be worth over £150,000, assuming an optimistic-but-not-impossible average annual return of 10%. After 20 years, it will be worth slightly more than £390,000. Stay invested for 30 years and you’ll have over £1,000,000.
To generate this kind of return in reality, however, you’ll need to be comfortable with having most of your cash tied up in stocks. This is vital since equities have consistently been the best performing of all assets over the long term.
To be clear, the longer you stay invested (and the more you save), the better your chances of retiring a millionaire.
3. Become a millionaire on the cheap
Becoming a millionaire is all about learning to buy at the lows and sell at the highs, right? Ideally, yes. The easiest bit of investing advice to convey is, however, also the hardest to achieve in practice.
Very few people are able to get their timing just right; even fewer are able to do so consistently over years of investing. This is why we think it’s a good idea to buy regularly and automate the process as much as possible. Most investment platforms offer their clients the option to buy on a set day every month, thus avoiding the temptation to ‘time’ their purchases.
Another positive to doing this is that it keeps costs low at around £1 per trade (costs vary depending on which platform you use). That’s far better than paying the normal charge of around £10-£12. Over many years of investing, paying the latter can have a huge negative impact on returns regardless of how good a stock picker you prove to be.
A smart (but always Foolish) investor always endeavours to keep costs as low as possible to reap the rewards further down the line.
