A £1m pot should be more than enough to fund a generous retirement income for most. The 4% rule suggests that I should be able to withdraw around £40,000 per year while maintaining the balance of my account.
Amazingly, building a £1m retirement pot could be achievable with just a small regular investment, over a long period. The miracle of compound returns helps significantly in reaching this goal. Compound returns create a snowball effect where I’d get a return on my return in addition to my original capital.
Say I invest £5,000 in UK shares and it grows by 10% over the first year. By the end of that year, I’d have £5,500. Let’s say in the second year, the investment grows by 10% again. My total investment at the end of the second year would have grown to £6,050. Without compound returns, I would have just £6,000.
That might not look like a big difference, but over many years it can sure add up. Using the same example, with compounding returns, over 30 years a single £5,000 investment at a 10% return per year would return over £87,000. Without compounding returns, I calculate that I’d have only £20,000.
The retirement plan
To create a £1m retirement pot for when I plan to retire in 30 years, I calculate that I’d need to invest just £450 a month in a selection of quality UK shares. That’s just £5,400 per year.
The average long-term stock market return is said to be around 7%-10% per year. But by researching further and investing in cheap, high-quality UK shares, I try to achieve a return of at least 10%. My £1m retirement plan requires just £450 per month because it will be invested for a long period. Patience will be required to stick to the plan.
Small tweaks can make significant differences in the long run. For example, if I increased my monthly investment from £450 to £750, I should reach £1m in 25 years instead of 30. The same result could be reached by investing £450 per month at a 13% return instead of 10%.
So, over the coming years, I’d be trying to do both – increasing my monthly investment savings and attempting to increase my annual gains from quality UK shares.
UK shares in a stock market crash
In addition to a fixed monthly investment, occasionally I might add a lump sum. Often, immediately after a stock market crash can be a good opportunity to add to long term investments. In a market panic, I should be able to buy UK shares at a discount. I find that the bigger the stock market crash, the bigger the opportunity.
In recent years, the largest stock market crash was that of the financial crisis in 2008/09. The decade following that crisis saw some magnificent gains in UK shares and with hindsight, it was a good time to add to long-term investments.
It can be difficult investing in a stock market crash. Stock prices are falling, news flow is negative, and investor sentiment is weak. Investing when nobody else is can be a challenge. Investing legend Warren Buffett once said that investors should be “fearful when others are greedy, and greedy when others are fearful”. Perhaps we should all take that piece of wise advice.
