So how likely are you to become a millionaire?
Today I’ve been researching the probability of becoming a millionaire during my lifetime and I came across some interesting facts. It’s been estimated that close to 50% of workers regret not having saved enough money into their retirement fund before they stop working. A major part of that regret is not starting soon enough. The first few years of pension savings, compounded over all of the following years, are worth far more than the same amount saved towards the end of your working life.
Why the early years are so important
Let’s take the average person’s 40-year work span and imagine we’re investing £100 per month at a return of 6% per year for the first five years. We then move jobs and don’t invest anything else. After five years we’d have accumulated slightly under £7,000, but after a further 35 years of compounding at 6% per year, it would turn into £53,700. That’s quite a sum for only five years of investing.
Now let’s imagine another worker who didn’t start saving till 22 years before retirement and then puts away £100 per month at the same 6% interest. They’d end up with almost exactly the same amount for investing £100 per month but they’ve taken an extra 17 years of investing to achieve it! Such is the power of compounding.
ISAs are a really great way to accumulate wealth whilst keeping it out of the tax man’s reach. Although company pensions and SIPPs provide the main route for retirements savings, making the most of your annual ISA allowance is a great way to provide for your old age.
The new allowance from April this year stands at £20,000. If you were able to invest that full amount every year at an annual return of 6%, it would only take you 24 years to reach £1 million.
So how much would you have to invest per month to achieve the magic £1 million figure over a 40-year career? Surprisingly not a huge amount – only £6,300 per year. Of course, this is all hypothetical as most people will be on limited wages during their early years and will have to account for mortgages, education fees and household bills.
But if you have the means it would be perfectly possible to become a millionaire by only saving about £500 per month. The key here is that you’d have to save that amount every single month to take advantage of the power of compounding.
Dividends are important too
The figures above presume that you’ve also reinvested all your dividends over those 40 years, but what would happen if you dip into them now and then for a bit of extra cash? It wouldn’t make much difference, would it? Well, the big news here is – don’t be tempted, because it can destroy any chance of becoming the retirement millionaire you’ve been dreaming about.
If you’d invested £100 in the UK stock market in 1945 and spent all your dividends, you’d have £9,148 after adjusting for inflation – more than 90 times your original investment. Not bad! But if you’d reinvested all your dividends in new shares, you be looking at a retirement fund of an incredible £179,695.
It simply can’t be stressed enough how important it is to re-invest your dividends until you’ve built a savings fund big enough that you can comfortably live off for the rest of your life.
Becoming a millionaire might not be possible for everybody, but if you invest regularly and keep at it, it’s certainly not impossible.