More of us look set to work on into our late 60s and 70s, as the State Pension age is pushed back, and we fail to save enough under our own steam.
Time to get ambitious
That’s fine if you love your job, but new research shows plenty of people would love to retire well before then. On average, working adults aim to retire at age 64, two or three years before the rising State Pension age, new research from Canada Life shows.
So the early retirement dream lives on – and you could even retire at 60, provided you start saving early enough.
Take the tax-free option
If you have a workplace pension with employer contributions, then you have a head start. Do not opt out, whatever you do.
You could back this up by taking out a self-invested personal pension (SIPP), otherwise you could make your million inside a Stocks and Shares ISA, where all your growth and dividend income rolls up free of income tax and capital gains tax, for life.
That is a massive benefit, otherwise the taxman can take a fat chunk out of your returns. I would recommend avoiding the Cash ISA, except for short-term savings, because over the longer run, stocks and shares should deliver a superior return.
If saving for retirement, you should be investing over periods measured in decades, and over that kind of term, you can hope for annual returns of around 7% a year, including share price growth and company dividends.
Why dividends are key
Dividends are regular payouts that companies give shareholders as a reward for holding their stock, and company boards aim to increase them, year after year. The key is to reinvest them back into your portfolio, because that way they will buy you more shares, which will pay out more dividends, which will buy more shares in a constant virtuous circle.
The FTSE 100 currently yields around 4.5% a year, far more than you will get on cash, with share price growth on top.
You could start your quest to build a £1m ISA portfolio by investing in a simple passive index-tracking exchange traded fund (ETF), such as the iShares FTSE 100 UCITS ETF. Or you could spread your wings internationally with a global tracker such as the popular Vanguard FTSE All-World ETF (VWRD). That is a one-stop shop that gives you exposure to more than 3,000 stocks across major markets such as the US, Europe and Asia.
You could balance these with trackers investing in the UK’s FTSE 250, the US S&P 500, or many other indices.
ETFs are popular because they have rock bottom charges, which means you get to keep more of your growth, rather than paying it to a fund manager in fees.
Starting early is the key to building a big enough portfolio to retire early. Every year you wait, the process gets harder, because your money has less time to grow. You can invest in individual companies as well, such as the ones highlighted in this report.
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Harvey Jones 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.