Alongside the Self-Invested Personal Pension (SIPP), the Individual Savings Account (ISA) is a powerful weapon for building long-term wealth.
The Stocks and Shares ISA allows individuals to capitalise on the vast investment potential of shares, trusts, and funds, without having to pay a penny in capital gains tax or dividend tax.
But how much would someone need in an ISA to retire early?
Ballpark figures
There’s no definitive answer to this question. An individual who plans to travel the world and live an adventurous lifestyle will have different needs to someone who fancies kicking back and taking it easy.
The amount a person will need in retirement will also depend on where they live and their relationship status. Early retirees will have to consider other things too, like whether they’re still paying the mortgage off or have children living at home.
However, research from the Pensions and Lifetime Savings Association (PLSA) provides a handy ballpark figure on what may be needed if retiring today, based on financial goals and relationship status. The figures are:
| Retirement living standard | One-person household | Two-person household |
| Minimum | £14,400 | £22,400 |
| Moderate | £31,300 | £43,100 |
| Comfortable | £43,100 | £59,000 |
While useful as a starting point, the cost of living and social care today is likely to be significantly lower today than 20 years from now. The level of the State Pension could also be substantially different, meaning future retirees may need more money put aside in an ISA than those retiring today.
A £74,875 target
So to get a better idea, I’ve taken into account the long-term rate of UK inflation — 2.8% — and adjusted what the PLSA says people need today for a comfortable retirement (£43,100).
Based on this calcuation, a single person hanging up their figurative work apron 20 years from now will need £74,875 a year to live comfortably.
To hit that target, they’ll need £901,250 in a Stocks and Shares ISA, assuming they then invested this sum in 6%-yielding dividend shares.
This also assumes the full State Pension grows in line with inflation of 2.8% over the period.
A top fund
That may seem like an enormous sum of money. But a balanced portfolio of blue-chip shares could make this possible.
A fund like the iShares S&P 500 ETF (LSE:CSPX), for instance, is worth considering. It’s a well-diversified product that’s delivered an average annual return of 13.2% since 2010. If this continues, a 40-year old who invested £800 here each month could have an ISA of £931,830 to retire on at 60, well before the State Pension age.
By investing in 500-odd blue-chip US companies, it provides exposure to rock-solid companies with market-leading positions and strong balance sheets. With a huge weighting of technology shares (like Nvidia and Apple), it also has substantial long-term growth potential.
Returns may disappoint during broader stock market downturns, like the one we’re seeing today. But over the long term, a fund of heavyweight shares like this produces enough wealth for an early retirement as the global economy grows over time.
