Many investors dream of being able to retire with £1m in the bank. The good news is my figures suggest this is possible with a stringent savings and investment plan. Today, I’m going to explain my strategy to make a million using an ISA for retirement.
Make a million
At the core of my millionaire-maker strategy is the stock market. Over the past few decades, the stock market has produced an average annual return for investors in the region of 8%. I see no reason why the market cannot repeat this performance in the decades ahead. That tells me stocks could be one of the best assets to own to build wealth in the long term.
In my opinion, owning stocks in an ISA is one of the best ways to hold this asset class. You can only contribute £20,000 a year to an ISA, but its tax benefits more than make up for these limitations. Any income or capital gains earned on assets held inside one of these wrappers doesn’t attract tax. You don’t even need to declare the income on your tax return.
Following the recent increase in the dividend tax rate to 7.5% on any dividends over £2k a year for basic-rate taxpayers, these tax benefits could potentially be worth tens of thousands of pounds in the long run. This is why I think an ISA is a perfect tool to make a million.
To replicate the performance of the stock market over the past few decades, I’d buy a low-cost passive tracker fund. After the initial investment, I’d set up a monthly investment plan to make the most of the wealth-creating power of the stock market in the long run.
According to my calculations, £10,000 invested in the stock market at an average annual return rate of 8% could grow to be worth £220,000 after four decades.
However, with the addition of an extra £100 a month, the final total could hit £541,000. An additional £200 a month would provide an absolute value of £870,000, according to my calculations. And an extra £300 a month could potentially yield a final investment value of £1.1m.
I think these figures show just how straightforward it can be to make a million in an ISA. Even at the higher target of £300 a month, the total outlay is only £3,600 a year. That’s easily under the annual ISA cap of £20k.
The £1m nest egg would easily provide enough cash to retire on in comfort. The market’s current dividend yield sits at around 4%. This level of income on a financial nest egg of over £1m could provide an annual income in retirement of more than £40,000 a year.
That’s the strategy I’d use to make a million by retirement. Indeed, I already have a regular investment and savings plan in place. All I have to do is make sure the money is available each month, and the market takes care of the rest.
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Rupert Hargreaves 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.