If you want to retire with a million in the bank from a standing start, it’s going to take some doing. However, with a strict savings and investing plan, reaching this target isn’t as hard as it first appears.
Crunching numbers
If you want to build a £1m nest egg, you would need to put away around £1,750 a month for 40 years in a savings account with an interest rate of 1%. That’s a tremendous amount of cash, and would be an impossible target for most people to meet.
Luckily there’s another way. By investing your money, you can significantly reduce the time it takes you to hit that £1m benchmark, and you won’t have to put away as much each month as well.
Investing for the future
By investing, you can achieve a much higher return on your hard-earned cash. For example, over the past three-and-a-half decades, the FTSE 100 has yielded a return of around 9% per annum for investors. That’s including income and capital growth.
Compared to the 1% or less available on most cash savings accounts right now, this rate of return is highly attractive.
While it’s difficult to predict what the future holds for the market in the short term, over the long run, the FTSE 100 should continue to produce attractive returns for investors. As more than 70% of the index’s profits come from outside the UK, it is a global index. This implies that if the global economy keeps growing, the FTSE 100 should also continue to head higher.
Once again, it isn’t straightforward to tell what sort of growth the global economy will achieve in the next three-to-five years. However, over the next few decades, it’s highly likely the economy will be much bigger than it is today.
Compound interest
Using the same numbers from the example above, £1,750 a month invested in the FTSE 100 would grow to be worth £8.3m after four decades. That’s assuming an average annual return of 9%.
To hit the £1m mark, monthly contributions of around £230 a month would be required for 40 years.
It’s vital to keep costs low as well if you want to save as much of your money as possible. Today, investors can buy an FTSE 100 tracker fund with costs as low as 0.1% per annum. This suggests total fees of around £25k over the 40 years of saving (included in the example above).
However, picking a fund with an annual charge of more than 0.1% would have a much more significant impact. A yearly fee of 0.5% would cost £124k over the four-decade time frame. Meanwhile, a fee of 1% would cost a total of £230k.
That’s why it’s essential to keep fees low if you want to make a million. If you find a low-cost FTSE 100 tracker fund, all you need to do then is sit back, relax, and watch your money grow (as well as keeping up the monthly deposits).