How can you become an ISA millionaire?
What do you have to do to accumulate an ISA worth £1 million pounds?
There’s a glib answer and a more boring, but realistic answer.
The glib answer: well if you had invested £25,000 in Amazon back in November 2008, that money would now be worth £1 million.
Of course, back in 2008 the annual ISA allowance was a lot less than £25,000, so you would need to have accumulated the money and put it into the ISA over two or three years first.
A better idea would have been to have invested £4,000 in Amazon in November 2001, or just over £1,000 in 1997 when Amazon was floated.
But that is called investing in hindsight.
To pick the next Amazon you need to be either a genius or very lucky. Or have a diverse portfolio with the odd potentially lucrative investment, perhaps.
I don’t wish to be rude, but I am assuming you are not a financial genius.
So what can you do?
The more practical route
I am going to make an assumption. I assume, that if you have the ambition to accumulate £1 million, you want the money to be inflation adjusted. A million pounds today, might be the equivalent of £2 million in say twenty years time.
Let’s say you invest a certain amount every year, and your portfolio follows the fortunes of the FTSE 100.
Since the index was founded in 1984, the index has risen seven fold. After allowing for inflation, the index has more or less doubled, that’s in real terms. But take into account dividends, which have averaged three per cent a year since 1984. I calculate that the average return on the FTSE 100, after inflation, was five per cent a year.
So, if you were to save the full ISA limit every year, and your average return was five per cent a year, how long would it take to accumulate a million pounds?
It takes a simple bit of work on Excel to reveal that if you saved £20,000 a year — the full ISA allowance for an individual — and your ISA accumulated by five per cent a year, in real terms, it would take 27 years.
So let’s say you want to retire at 60 with a £1 million ISA (in real terms) then you would need to stick £20,000 into an ISA every year from the age of 33.
Of course, if there are two of you, and you can save £20,000 each, the saving period would be much quicker — I calculate 19 years.
You may have spotted an important point here. How long you save is key. If you double your savings rate from £20,000 to £40,000 your savings period drops from 27 to 19 years — such is the magic of compound returns.
Let’s say you can’t afford £20,000 a year and you can only afford £10,000. How long must you save to accumulate £1 million — inflation adjusted?
I calculate that would take 37 years.
And if you saved £500 a month; I calculate 48 years.
That seems like a long haul. But bear in mind, people currently aged somewhere in their 20s probably won’t retire until they are in their 70s.
Can you do better?
You might be able to improve on that by applying certain rules. For example, waiting until after the FTSE 100 index has fallen sharply before buying.
If you had begun accumulating an ISA in either the spring or summer of 2001 or 2009, you would have been investing during a period when the FTSE 100 was set to approximately double — in the case of the period 2001 to 2007 almost double, and more than double between 2009 and 2016.
But that is not so simple. Getting the timing right is nigh on impossible. One of the advantages of investing a certain amount every year is that you get diversification over time — sure you lose out if shares crash, but you also benefit from a stock market recovery.
Becoming a millionaire is never easy — you can beat the timings I outline above if you are smart with your buying — if you can find the next Amazon.
You should never invest all your money in one company, but let’s face it, if you were to invest a small proportion of your portfolio in a company that turns into the next Amazon: the creation of your million pound ISA should occur much faster.
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