Owning a one million pound ISA account and being able to retire comfortably is a goal for many UK investors. And with annual ISA allowances being increased significantly to £20,000 per adult in recent years this goal has certainly become a lot more achievable.
While my own ISA balance is still well below the million mark, I’m convinced that if I play my cards right I can build it up to that level and more well before I retire. With that in mind, here’s a look at my simple three-step plan.
Step 1. Invest in the best ISAs
The first step when it comes to making a million within an ISA begins before any money is invested – it starts with picking the right ISA. With Cash ISA interest rates remaining extremely low at around 1%, making a million through this type of savings account could be very hard indeed.
For this reason, I’ve chosen to invest through both a Stocks & Shares ISA and a Lifetime ISA. Both allow me to hold a wide range of growth investments such as stocks and funds meaning I can grow my money much faster than if it was held in a Cash ISA. Moreover, the Lifetime ISA has the added advantage of coming with 25% bonus top-ups from the government.
Step 2. Maximising my allowances
The next step involves making the most of the new generous allowances that are available and investing as much as possible within my ISAs every year. Now, I don’t expect to be able to invest the full £20,000 every year. However, if I can invest as much of that allowance as I can, my portfolio balance should increase at a healthy rate over time and continually get closer to a million. I’m particularly keen to max out my annual £4,000 Lifetime ISA allowance every year to pick up the £1,000 bonus money.
Step 3. Generate slow and steady returns
Finally, the third step involves investing my money to generate slow and steady returns.
While there’s no perfect investment strategy to generate one million pounds, I believe that the best approach is to focus on generating stable returns without taking on too much risk. That’s because preservation of capital is extremely important when it comes to building long-term wealth. If you lose a lot of money when investing, it can really set you back.
As such, I have invested the bulk of my ISA capital in FTSE 100 stocks that pay regular dividends with a smaller proportion of my portfolio allocated to growth investments.
This strategy has several advantages in my view. Firstly, the majority of my capital is invested in lower-risk stocks which means I’m unlikely to see the value of my portfolio fall too much if stock markets take a hit. Secondly, the dividends I generate can be reinvested back into the market, meaning I am always compounding my money and generating earnings on my earnings. Third, having a little bit of exposure to growth investments could potentially boost my total returns a little.
So overall, my ISA millionaire strategy is quite straightforward. It doesn’t involve short-term trading or any complicated investments. By using the right ISAs, investing regularly and focusing on slow, steady returns, I believe that I can build my ISA up to a million.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.