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Is this the best way to make £1 million for your retirement savings?

I was staggered to learn that 50% of the UK population play the National Lottery each month, buying an average of three tickets each.

How much?

That’s 33 million people, spending £6 per month, for a whopping total of almost £2.4bn per year. How many actually make it big and get to live the rest of their lives in millionaire comfort? The odds against winning the Lotto jackpot come in at 45,057,474 to 1, so that’s around two tickets per month winning the big one out of tens of millions of people playing.

Playing the lottery is clearly not the best way to provide for our retirement. But the scary thing is, for many people it’s the only investment they ever make. But what if you put that £6 per month into FTSE 100 shares for your entire working life?

If you can achieve the 8%-10% annual returns that are often suggested by financial experts, you could turn your lottery stake into somewhere between £40,000 £90,000 over a 50-year working lifetime. Now, that’s not close to a million, but it does give us some idea of how much potential the average UK lottery player is forfeiting.

1,000 ISA millionaires

On a cheerier note, in the 2017-18 tax year, 10.8 million adults subscribed to an Individual Savings Account (ISA) — and they contributed a total of £69.3bn, far more than the cash spent on the lottery.

An ISA lets you invest up to £20,000 per year (at current allowances), and all the profits you make on it for the rest of your life are tax free. By using up as much of your annual allowance as you can and reinvesting all income, the magic of compound returns can result in your bagging a very significant sum by the time you retire — you might be surprised to learn there are an estimated 1,000 ISA millionaires in the UK now.

Cash ISA

So is that the best way to accumulate £1m for your retirement? For 7.8 million of those 10.8 million ISA investors, sadly, no. That’s how many went for a Cash ISA, and of the £69.3bn invested in ISAs in total, £39.8bn of that went into Cash ISAs.

What’s wrong with that? The problem is that Cash ISA interest rates are truly lousy, and you’ll be lucky to get 1.5%, even if you shop around. That’s due to the Bank of England base rate being down to a lowly 0.75% — and while UK inflation is running at 2%, an ISA return of 1.5% guarantees that you’ll lose money in real terms.

Stocks & Shares

The canny ISA investors are the 2.8 million who went for a Stocks & Shares ISA, investing a total of £28.7bn. If you could invest the full £20,000 per year, it would take you 38 years for your pot to reach £1m using a 1.5% Cash ISA (and you’d have contributed £760,000 of that directly). If you manage an annual return of 8% as many experts suggest is realistic from shares, you’d reach the magic million in just 21 years, having contributed just £420,000.

Few of us can invest the full amount, but £710 per month (£8,520 per year) in a Stocks & Shares ISA at an average return of 8% would make you a millionaire in 30 years — and you’d have more than three times what you’d get from investing the same amount in a 1.5% Cash ISA for the same period.

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Views expressed 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.