A million pounds has a nice ring to it. I’m pretty sure you could retire comfortably with £1m in the bank.
However, you may think this is unrealistic. How can you save that much?
The good news is that hitting £1m could be much easier than you think. My calculations show that if you can spare £50 per week throughout your working life, then you should be able to retire as a millionaire.
In this article, I’ll explain how you could do this.
How my £1m plan works
My plan is based around two simple but important ideas. The first is that according to Barclays, the long-term average rate of return from the UK stock market is about 8% each year.
The second idea is that you should seek to benefit as much as possible from compound interest. All this means is receiving interest on previous years’ interest. It’s basically free cash – each year, you’ll receive more interest than the previous year, even though you’re not investing any extra cash yourself.
Compound interest is a hugely powerful concept, but it only works over long periods.
My plan to save £1m on £50 per week is based on a fairly average 43-year working life. Over this time, I estimate that you’d have to invest about £112,500 of your own cash in order to end up with £1m.
The remaining £887,500 would come from market gains, dividends, and compound interest. I think that’s pretty amazing, don’t you?
How to invest your cash
Where should you put your £50 per week? If you want to invest small amounts often without paying excessive fees, then I think the best choice is a low-cost FTSE 100 tracker fund (make sure you choose accumulation units – here’s why).
These are now available with incredibly low charges. For example, Vanguard offers a FTSE 100 tracker fund with an annual fee of just 0.06%. If you put a tracker fund like this inside a cheap Stocks and Shares ISA, you should be able to keep total fees down to less than 0.5% each year.
Plus, by using a Stocks and Shares ISA, you’ll avoid any tax on capital gains or income in the future. Winner winner.
Don’t forget this secret
How can you maximise your chances of successfully hitting your £1m target? Start today.
If you can’t afford £50 per week, then start with less. The earlier the start, the more you’ll benefit from compounding, especially in later years.
There are plenty of FTSE tracker funds that allow deposits as small as £25, so you could start with very little. Then each time your income increases, increase your monthly saving by a similar amount.
During your working life, you’ll probably see several stock market crashes. Don’t let these scare you out of the market. Stay invested and keep paying in each month.
History suggests that the market, like the real economy, will always recover. Patience – and a cool head – are often richly rewarded.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.