I’d drip-feed £417 a month into a Stocks and Shares ISA to try for a million
As of 2021, there were over 2,000 ISA millionaires in the UK. So all those people have built up £1,000,000 via an account that has a maximum deposit of £20,0000 per year.
If it was just down to saving that cash, it means a 20-year-old would need to deposit the full £20,000 every single year until they turned 70. Seems utterly impossible, at first glance.
But if I work out the maths, I could get all the way to the million pound mark with only £5,000 a year (£417 a month) and in much less time than 50 years. But it would only be possible if I use one particular type of ISA.
What type of ISA?
I’d put good money on most of those 2,000 ISA millionaires using a Stocks and Shares ISA to build their wealth. The reason is that this type of ISA offers the highest potential with 8-10% being typical annual stock market returns over long periods of time in the past. Investing in stocks does come with risks however, and no returns are guaranteed.
Another popular type of ISA is the Cash ISA. This one is very safe but with low returns that are linked to interest rates, which are 4% at present. Let’s run the numbers and see how they compare.
Let’s say I’m starting from scratch and want to hit a million in my Stocks and Shares ISA. I’m going to aim to save £5,000 a year by drip-feeding £417 a month.
What kind of percentage return could I expect? Well, the FTSE 100 – the collection of the 100 largest companies listed on the London Stock Exchange – has historical annual returns of around 8%. The FTSE 250 – the 101st to 350th largest companies – has returns of around 10%. Let’s assume a 9% annual return.
Cash ISA (3%)
Stocks and Shares ISA (9%)
It’s clear from the table just how much investing in stocks can improve returns, especially over the long term as compound interest works its magic. And it looks like I’d potentially join the ISA millionaire club after 34 years. Now, what if I wanted to reduce that amount of time?
How to increase returns
One way to improve returns is to invest in individual stocks. For example, if I invested in Amazon in 2005 I’d have netted 5,000% returns up to now – a 50 times return on my stake. Compare this to the FTSE 100, which is up 60% in the same timeframe. That could get me to a million a lot quicker.
Of course, companies can go bankrupt or have a lean period. I think the best philosophy is a balance of carefully chosen stocks while remaining diversified across different companies and sectors.
Try for a million?
In reality, I’m not fixated on getting to a million just for the sake of it. But I do think this is an illuminating exercise to show why investing in stocks and shares is a powerful way to build long-term wealth.
And with the tax advantages of a Stocks and Shares ISA? I’m very happy to drip-feed regular savings to do that.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023