Being able to retire with a million pounds in the bank might seem like an unrealistic prospect at first, but it is possible to meet this goal. All you need is time and a regular savings plan.
Today, I’m going to explain how you can meet this target, and how much you need to put away every single month to become a millionaire by the time you retire.
Slow and steady wins the race
You might think that to make a million by the time you retire, you’ll have to take a lot of risks. That’s not the case. You don’t have to gamble with your money by investing in high-risk small-cap stocks or Bitcoin to try and reach this goal.
Of course, you can invest in small-caps if you want, but I think it’s much more sensible to buy a basket of blue-chip stocks that you can buy and forget.
Indeed, by using this approach, you don’t have to worry about your investments, and you can spend the extra time available to make sure you’re putting away enough money every month to be able to reach your goal. So how much is enough?
Well, according to my research, the FTSE 100 has produced an average total return for investors of around 8% per annum for the past two decades. While your actual and annual return will ultimately depend on the stocks you decide to buy for your portfolio, for simplicity’s sake, I’m going to be using this return for the basis of my calculations.
The more time you have to save, the easier it will be to make a million by the time you retire. For example, an investor who’s planning to retire five decades from now will only need to save £125 a month to make £1m — that’s assuming an average annual return of 8%, but excluding inflation and fees.
Most people don’t have that much time left to save so, in most cases, the monthly contribution required will be significantly higher. Although it’s still entirely possible to make a million no matter how many years you have left to work.
Number crunching
According to my calculations, you need to put away £275 a month at an average annual return of 8% to make a million in the space of four decades. If you only have three decades to go until you retire, you will need to save approximately £660 a month.
It becomes a lot harder in the last two decades before retirement. If you want to build a million-pound pension pot in just 20 years, you’re going to need to save £1,700 a month. And if you’re going to do it in a decade, the figure is £5,500 a month. All of these figures assume an average annual return of 8% and exclude fees and inflation.
So that’s how much you will need to save every month to retire a millionaire. As the figures above show, no matter how much time you have left, it’s not entirely impossible to reach this goal, although the earlier you get started, the easier it is.