How investing £300 a month in the FTSE 100 could help you retire a millionaire!
Many of my friends ask me if its possible that they could retire as millionaires. My simple answer is, yes. Even on a minimal income level, I believe people can become millionaires by retirement age if they start early enough.
How is that possible? they understandably ask. I reply that its through investing regularly and the magic of compounding returns. Lets take a closer look.
Compounding returns
Lets assume that youre 25 years old with only 100 in savings and that you plan to retire at age 65. You invest that 100 and earn an 8% annual return. Then you make an additional 3,600 of contributions annually at the start of each year.
You have 40 years to invest. The annual return is 8%, compounded once a year. At the end of 40 years, the total amount saved becomes 1,009,384!
Saving 3,600 a year would mean being able to put aside about 300 a month or about 10 a day. Might you just be wondering if you should skip that next impulse purchase?
Investing later in life?
On the other hand, if you wait to start investing until youre 30, you will have only 671,446. The difference is due to the power of compound interest. This has a snowball effect on personal savings. As time goes on, interest leads to more money, over and over again.
In other words, if you start saving later in life, you have to save more each year in order to make up the difference. For example, if you start investing at age 40, then you would need to save and invest slightly over 1,000 a month to reach a million in your retirement account by age 65.
Ensuring a financially secure retirement
The full basic state pension is currently 168.60 per week. Do you truly believe you can live on that amount for the rest of your life after retirement?
Its important to have a realistic view of how you can pay for a retirement of several decades. For example, Id encourage you to contribute to your workplace pension scheme if you have one.
Every UK resident should also learn more about the different types of ISAs available to them, with an emphasis onStocks and Shares ISAs.
My Motley Fool colleagues regularly coverFTSE 100andFTSE 250 shares, as well as funds to consider adding to a diversified retirement portfolio. They point out that the stock market returns about 7% to 9% annually on average.
FTSE investment options
The FTSE 100 seems to be the initial index Britons mostly consider when they first start investing. Its composed of the 100 largest companies, by market capitalisation, on the London Stock Exchange (LSE). The FTSE 250 is the next 250 largest companies and also has a number of investment trusts.
As you start learning more about the investment choices available, youre likely to feel that some companies may be more appropriate for novice investors.
You may, for example, want to initially stay with large-cap shares as well as those with high (but reliable) dividend yields. Any capital gains delivered by the stock would be an added bonus on top of the dividend.
Another option could be to invest in low-cost exchange-traded funds (ETFs), which track popular stock indices both in the UK and globally. For example, if youre interested in dividend stocks, then theiShares UK Dividend UCITS ETF may be an ETF to consider.
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