Want to make a million? Of course you do. Everyone’s circumstances are different and subject to change, so for this article I’ll be working with some assumptions. The person saving a million is 20 and will be working until the planned retirement age of 67 (which could be even higher by 2056). This gives 47 years to save £1m based on just £90,240 saved.
1. Start with a good fund
Begin by investing monthly savings into a low-cost passive index tracker. These funds track the performance of all the companies in a particular index. This could be the FTSE 100 or you may prefer a fund that tracks the whole global stock market. The benefit of these funds is that they will replicate the average performance of the whole index with very low fees. This means that you do not need to know anything about the stock market or keep up to date with the news. The average yearly growth for the FTSE 100 over the past 20 years has been 5.4% excluding dividends, a better return than most investors have achieved over the same period.
If you invest £160 a month into a fund that returns 5.4% annually, after 47 years you will have a very respectable total of £410,457. This sounds like a lot, but the reality is most people live for a long time after the age of 67 and this might not go as far as you might think. So how do we get from less than half a million to a million?
2. Take advantage of employer pensions
Fortunately you can immediately take advantage of the workplace pension scheme, and your employer will have to contribute 3% of your salary from April 2019. Many employers will voluntarily match a higher amount than this. If you earn £30,000 per year then your employer will have to put in an additional £60 per month. I suspect this will also rise over time as people become more concerned about how adequate the state pension is. This calculation also ignores that your wage will probably start below this but end up higher.
There are several options but I would go for a self-invested personal pension (not a workplace pension, but your employer can contribute to it along with/instead of contributing to your workplace scheme). A SIPP lets you manage your money and invest in a passive tracker as mentioned above. With a SIPP you can choose exactly what products to invest in and will not pay income or capital gains tax on any profit.
3. Make the most of tax benefits
A SIPP gives you 20% tax relief on what you pay in. Therefore investing £160 a month would also return you an additional £40. Combined with a 3% employer contribution, this rises to £300. If you are lucky enough to have an employer that matches your contribution, then it would put in £200 for your £160+£40, taking the total to £400. This monthly contribution would earn you just over £1m when compounded at a growth rate of 5.4% over 47 years. This may not sound easy now, but in reality your contributions are likely to be lower today and exceed this further down the line.
With rising living costs and an ageing population, I think UK citizens should be concerned about whether the State Pension will be sufficient in the future. Fortunately if you start early, employer pensions and careful management can help you save for a comfy retirement.
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RobertFaulkner1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.