One million pounds is a lot of money by anyone’s standards and a £1m retirement fund is certainly enough to ensure you will enjoy a comfortable retirement. Today, I’m going to outline three strategies that I believe can help you reach this life-changing amount.
Self-invested
The first I want to recommend is making the most of the tax benefits available with self-invested personal pensions, or SIPPs.
SIPPs are a fabulous tool for investors saving for the future because not only do you get tax benefits when you contribute, but all income and capital gains on assets held within a SIPP wrapper are tax-free.
These benefits will really add up over long term. For example, a basic rate taxpayer putting away £800 would receive an additional government bonus of £200, taking the total contribution to £1,000. Assuming an annual interest rate of 5%, over 10 years £800 would grow into £1,300, whereas the full £1,000 would be worth £1,640. That’s an extra £340 for absolutely no work on your part.
At this rate of return, you’d need to save £800 a month before the government bonus for 35 years to make a million in a SIPP. However, the longer you have to save, the less you will need to contribute, as I explain below.
Lifetime ISA
Another strategy is to make use of the relatively new Lifetime ISA, or LISA for short. These are perfect for the younger saver.
If you’re under the age of 40, you can opt to put up to £4,000 in your LISA each year and receive a 25% top-up from the government. If you start saving at 18 and max it out every year until you’re 50, you’ll pick up a total of £33,000 from the government.
And according to my calculations, if you do save the maximum in your LISA every year, you could make a million before 50, if you start saving at 18.
Assuming you invest this money in a low-cost FTSE 250 tracker fund, and this tracker fund performs as well as it has done over the past two decades, (around 9% per annum), you could retire on a pension pot of just under £1m using a LISA.
Dividend income
In the examples above, I’ve assumed investors are investing in funds to generate returns. Dividend stocks are another great way to build wealth as they allow you to generate money while you’re sleeping.
A portfolio of high-quality dividend stocks also gives you a regular income, so you don’t need to draw down on your capital in retirement. Your retirement savings will likely last longer as a result.
The UK’s leading blue-chip index, the FTSE 100, is one of the best places in the world to find high-quality dividend stocks. Today, you can find shares in companies that are household names which yield as much as 7%.
Including the capital gains component, I don’t think it’s unreasonable to assume that these stocks could produce an annual return for investors of 10% or more. At this rate, you’d only need to save £500 a month for 30 years to build that million-pound savings pot.