The average spending on takeaway coffee in the UK is £303 per person per year. While doing so clearly brings enjoyment in the short run, investing that amount of money in the FTSE 250 over a working lifetime could provide a nest egg of £250,000 by the time an individual is due to receive their State Pension.
With no return on the £303 investment per year, it would amount to just £15,150 over the course of 50 years. However, if it is invested in the FTSE 250, which has generated an annualised total return of over 9% in the last 20 years, it really could be worth that £250,000 figure. This could provide a realistic income of £10,000 per annum in retirement, which works out as 4% of the total sum. This is more than the £8,546 provided per year by the State Pension.
Of course, the calculations assume that the FTSE 250 will continue to rise at the same pace as it has done over the last 20 years. They also do not factor in the impact of inflation.
While going without coffee for a lifetime may be somewhat extreme, the key takeaway is that investing even small sums of money in a diverse range of mid-cap shares can lead to a surprisingly large nest egg in the long run.
Furthermore, there is scope for an individual to benefit to an even greater extent in the long run from using financial products such as a SIPP or a Lifetime ISA. They offer significant tax advantages that may lead to even higher returns being generated. A Lifetime ISA, for example, offers a 25% government bonus on all amounts invested up to a £1,000 bonus per year. Contributions to a SIPP, meanwhile, are tax-free for most individuals, while up to 25% can be withdrawn tax-free from the age of 55.
Clearly, there are risks from investing in the stock market. During the last 20 years the FTSE 250 has endured two major bear markets that have sent its incumbents’ share prices significantly lower. And with the prospects for the UK economy continuing to be uncertain, there is a risk that the index could underperform its track record.
However, for investors who are able to take a long-term view of their retirement fund, investing modest amounts of money can deliver a retirement which offers greater financial freedom. While it may mean that consumption in the short run is reduced, in many cases there are products and services which are not needed. As such, the money may be better used within a SIPP or a Lifetime ISA in order to generate an improved retirement outlook.
If an individual could generate £250,000 in a lifetime from simply cutting out their coffee consumption, it is clear that there could be opportunities to generate a significant nest egg for most people. As a result, today could be a good time to start focusing on investing in a range of mid-cap stocks.
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