For most people, accumulating a £1m nest egg might seem like an unrealistic prospect. However, it really is possible to hit this milestone in just a few decades with a strict savings and investment plan.
Today, I’m going to highlight the strategy you could use to make £1m in the stock market by 65 from 40. That’s just 25 years of saving and investing.
Get some help
To hit the million-pound milestone, you’re going to need as much help as possible. With this being the case, it would be sensible to open up a SIPP. These tax-efficient retirement products are tremendous tools for pension savers. Any contributions into a SIPP are entitled to tax relief at your marginal tax rate. That’s 20% for basic rate taxpayers.
You can contribute to a maximum of £40,000 a year without losing this tax relief. The situation is more complicated for higher and additional rate taxpayers. Nonetheless, they can still achieve significant tax benefits using a SIPP.
Under this structure, for every £80 a basic rate taxpayer contributes, the government will add an additional £20, taking the total to £100. This will help you reach that £1m marker much faster.
Start investing
When you’ve opened a SIPP and started filling it up, the next step is to start investing your money. There are many stocks and different investment funds out there you can buy. However, the easiest way to invest in the market is to own a simple index tracker fund.
For example, over the past three-and-a-half decades, the FTSE 100 and FTSE 250 have returned around 9% and 12% per annum respectively.
To replicate this kind of return, all you’d need to do is buy a low-cost tracker fund, sit back, and relax. There would be no need to continually evaluate fund managers or pick stocks. All these tracker funds do is replicate the holdings of the underlying index.
Fund best buys
The UK’s biggest listed companies make up the FTSE 100 index. The FTSE 250, on the other hand, is made up of much smaller mid-cap companies. These firms tend to have better growth prospects. That’s why the index has achieved a much better return than the FTSE 100 since inception.
That said, because the index is made up of smaller firms, it does tend to be more volatile. This is bad news for short term traders. But if you’re investing with a long-term outlook, it could be worth accepting this volatility for higher returns.
Making a million
To accumulate £1m in the 25-year time frame (between 40 and current retirement age of 65) you would need to put away £550 a month. That’s assuming an average annual return of 12%, zero savings to begin with, and no tax benefits from using a SIPP.
Including tax benefits, it would take monthly deposits of just £440 for 25 years to make a million with the FTSE 250.