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Forget the National Lottery! FTSE 100 shares could be the key to financial independence

If you want to make millions in 2020, you may regard playing the National Lottery as a fun choice. But as with all lotteries, the odds of winning are extremely slim.

Several games with different payout amounts and winning odds operate under the National Lottery brand. For example, if you play Lotto and pick five numbers plus the bonus number correctly, your average prize would be £1m. However, your chance of winning is a dismal 1 in over 7.5m.

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But do not despair! Thanks to the power of compound interest, you can retire rich without shooting for the moon.Yes, you can still have £1m or even more in your account if you invest your savings, especially if you start young.

Longer-term ‘bet’

Focusing on FTSE 100 dividend stocks or FTSE 250 growth shares, rather than the lottery, may provide a more favourable risk/reward opportunity to retire rich. My Motley Fool colleagues have written at length about funds and shares to consider for a diversified retirement portfolio and have pointed out that the stock market returns about 7%-9% annually on average.

You can also find financial calculators online to see how much your savings would grow over time.

Let us assume you are 25, would like to invest £1,000, in a fund now and would make an additional £3,600 of contributions annually at the end of the given year. You have 40 years to invest. The annual return is 8%, compounded once a year. At the end of 40 years, the total amount saved becomes £954,327. If the annual return increases to 9%, the amount becomes £1.247m and if the return is 10%, the final number is £1.638m.

If you can increase how much you can save per month, say to £400 (or £4,800 a year), the amount at the end of 40 years at an annual return rate of 8% is £1.265m.

To recap: these numbers show that a person who saves about £3,600 per year for 40 years, starting at the age of 25 and investing in various funds, could achieve a nest egg of around £1m at the age of 65.

In other words, there is no need to play the lottery as we can pretty much all become millionaires in our lifetimes. Just remember is to start early and save a definite amount each month. 

FTSE investment options

The FTSE 100 is the index Britons mostly consider when they first start investing. It’s composed of the 100 largest companies (by market capitalisation) on the London Stock Exchange (LSE).

As one of the highest-yielding markets in the world, it currently has a generous dividend yield of 4.5%. Any capital gains delivered by a stock in your portfolio would be an added bonus on top of the dividend.

The FTSE 250 is the next 250 largest companies and they tend to derive more of their income domestically than larger peers. The index also has a number of investment trusts. The average dividend yield for the FTSE 250 is about 2.8%.

If you are new to investing, you could buy individual stocks that are suited to novices, or make it easy and buy into a FTSE 100 tracker. Another option could be to invest in low-cost exchange-traded funds (ETFs). For example, if you are interested in dividend stocks, then the iShares UK Dividend UCITS ETF may be an ETF to consider.

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tezcang 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.