Estimates suggest just over 1,000 ISA millionaires inhabit the UK. And if you’ve hit the age of 40 and find yourself bereft of meaningful savings, don’t fret. There’s still time for you to build a £1m ISA investment pot before you retire.
Routes to becoming an ISA millionaire
But first, let’s consider a route to a million you probably won’t take. With the annual ISA allowance at £20,000, it’s possible to make a million over 25 years if you invest the full amount each year and compound an annual return of 5%. If you do that, you’ll invest £500k and essentially double it.
However, investing £20k each year is a big ‘ask’. Many people will invest less. But the first step to building wealth is to invest regularly. So it could be a good idea to make monthly payments into your Stocks and Shares ISA wrapper. I’d make the payments as large as I could and increase them as often as I could.
The thing that will really get your investments motoring is the process of compounding. And the wonderful characteristic of compounding is that it works exponentially. In other words, your annual gains in pound notes accelerate over time for any given annual rate of return. So it makes sense to invest and compound your investments for as long as you can. After a period of compounding lasting, say, three decades, you may be astounded by how much your pot starts growing each year.
But your money will grow much faster if you increase the rate of annual return. Achieving 5% is fine. But get 10% each year and you’ll really be off to the races. When it comes to compounding, little increases in the annual rate of return add up to big increases in your eventual retirement pot of money.
Shares could increase your returns
Surveys suggest that Britain’s ISA millionaires invest about 60% of their money in the shares of individual stock-market-listed companies. And that makes a great deal of sense. Because individual company shares can give you perhaps the best shot at bagging market-beating returns. For example, in the news, as I write, FTSE 100 share Next has just shot up by around 10% in just one day!
Investment trusts are also popular among ISA millionaires. And they are a great way of achieving wide diversification across the markets. You’ll also have the advantage of having a fund manager or a team of managers running the investments in the fund. If you’re struggling to put time into your investing, investment trusts are a good option.
But I believe it’s possible to achieve outperformance by picking and managing your own shares. If you are prepared to put time into developing your investment strategy and analysing companies, you could do well. Indeed, if you are 40 now, that need not be a barrier to building a Stocks and Shares ISA worth a million by the time you retire.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of Next. 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.