Do you want to be an ISA millionaire? Dan Lane at Freetrade, a commission-free stock trading and investment app, recently shared his strategy to growing your ISA wealth to reach the £1 million mark.
That got me thinking. How easy is it to become an ISA millionaire?
Don’t miss out this ISA season
The ISA deadline is approaching so if you’ve not yet made the most of this year’s allowance, now is the time.
Stocks and Shares ISAs allow investors to pay in up to £20,000 each year – completely tax free. It’s not too late to take advantage of this year’s allowance…
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
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Grow your ISA wealth
The first step to becoming an ISA millionaire is to grow your ISA wealth.
To reach £1 million, you’ll need to get as much as you can out of your ISA. These tips ahead of ISA season will help you do just that.
You may also want to transfer your ISA to somewhere that better suits your requirements and will help you grow your ISA wealth.
This can prove to be a complicated process, so check out this article on the ISA transfer rules if you’re unsure.
Dan’s strategy to becoming an ISA millionaire
Writing on Freetrade, Dan Lane explained his own “more realistic” way to become an ISA millionaire.
You start off earning £25,000 at 25 years old, investing £2,500 each year until you’re 30, achieving 5% returns, compounded once per year.
At 30 you start to earn £30,000, just short of the national average. In your 30s you get yearly pay rises of 3%, just ahead of the Bank of England’s target inflation rate of 2%, and invest £5,000 each year.
At 40, your pay goes up to £45,000. You keep getting yearly pay rises of 3% and put away £10,000 each year in your 40s.
At 50, you start to earn £65,000, continue getting 3% pay rises and save £20,000 each year in your 50s.
At 60, you start to earn £90,000 and receive 3% yearly pay rises until you retire at 65. You save £20,000 each year from 60 to 65.
Taking into account a £3 monthly ISA fee, by retirement age, your total contributions of £461,060 have been able to snowball into a sum of £1,026,766.
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What if I invest the full ISA limit each year?
If you’ve got more disposable income now, you can in theory become an ISA millionaire quicker.
Investing the full £20,000 each year could get you there in 21 years. This is assuming annual returns of 7.5% – which is the average annual returns delivered by the FTSE 100 in its 37-year history. However, note that past performance is not a reliable indicator of future performance. There were, of course, periods where the annual return was far lower than 7.5%.
Over this period you would deposit £420,000 and you could earn £602,379.45 in interest.
This combines to give you a possible total of £1,042,379.45 at the end of 21 years.
If you take more risk (and if it pays off!) and you achieve 10% returns, you could get there after 18 years.
Alternatively, for the more risk-adverse – or if the markets don’t perform as well as expected and your returns average 5% – it might take you 25 years to become an ISA millionaire.
Want to go halves?
Only have £10,000 to put in a year? You can still grow your ISA wealth rapidly.
Commit to investing this sum every year and you could hit £1 million after 29 years, assuming average annual returns of 7.5%.
You’ll make monthly deposits of £290,000 and can earn £733,994.03 in interest/returns, combining to give you a total of £1,033,994.03.
Again, the time frame depends on your risk appetite and how lucky you get with the markets.
With 5% annual returns, you should get there after 35 years. Alternatively, with 10% annual returns, it may only take you 25 years to become an ISA millionaire.
Final thoughts
Of course, all assumptions made above are just that – assumptions. As previously noted, the Footsie’s average annual returns of 7.5% across 37 years isn’t a definitive figure each and every year – market crashes occur roughly once a decade historically, which would largely negatively impact the value of most investors’ assets at the time.
