Investment millionaire

Are you an aspiring investment millionaire hoping to benefit from stock market growth to achieve a seven-digit investment portfolio balance?

Here’s what you need to know, together with some alternative options to help you achieve your ambitions. Firstly, you need to understand the present value of money or the future purchasing power of money. Put simply, a million pounds in ten, twenty, or thirty years isn’t going to even come close to the purchasing power of a million today!

The average return on UK investments historically is around 5%, so assuming inflation returns to the levels previously seen of around 2.5%, you should expect to earn around 7.5% on your investments annually. The following examples are based on these figures.

A million in twenty years

Assuming an inflation rate of 2.5% per year, you’ll need around 1.6 million in 20 years to match the purchasing power of a million today. If this is your objective, the bad news is you will need to invest around £2,500 a month, assuming you get a 7.5% annual return on your investment. You will also need to increase the investment contributions annually by the rate of inflation. That’s not a realistic option for the average UK worker, as the investment contribution alone is more than the entire take-home pay for many individuals.

Patience pays off

The good news is that expanding the investment time frame and exercising some patience will reap rewards, making that magical million equivalent much more achievable. Investing £700 a month and increasing the contribution annually by inflation, could potentially produce the equivalent of a million in today’s money after around 40 years. That buys you lots of options, such as retiring early, taking a later-in-life gap year, or decreasing your working hours to part-time, to name but a few.

Reality with a 10% investment

Unfortunately, even £700 a month is unrealistic for the majority of UK individuals, given the average UK salary is around £32,000 a year. This makes the average UK take-home pay around £2,000 a month. Let’s assume someone decides a 10% investment contribution or £200 a month is a realistic and achievable amount. What will this be worth after 30 years of investing?

After thirty years, again assuming a 7.50% investment return and personal contributions increasing in line with 2.5% inflation, the investment will deliver around £347,000 or £165,000 in today’s money. Still, not a bad return considering the actual cash invested is in the region of £105,000 over 30 years. Oh, the magic of compounding interest and growth! Continuing with the investment for 40 years yields an impressive return of around £815,000 or £305,000 in today’s money. Not to be scoffed at!

Here are some tips to reduce both the monthly contribution and potential tax implications…..

SIPP

A SIPP or self-invested pension plan is a great way to reduce the monthly investment contribution by getting the government to pick up part of the tab. Investing within a SIPP allows you to claim the 25% personal pension tax allowance from the government. On a monthly contribution of £200, you’ll only need to pay £160 with the government paying the remaining £40. In the earlier example, £700 would be reduced to £560 a month using a SIPP.

The downside of a SIPP is you can’t access the money until you are 57 years old. You will also pay tax on 75% of the pension on withdrawal, with 25% being tax- free. A further benefit of a SIPP is that is it outside of your estate for inheritance tax. To learn more about SIPPs and pensions, click the link below:

Tax-free investing with an ISA

If you would like access to your investments and don’t want them tied up in a pension, consider investing using a stocks and shares ISA. You can invest up to £20,000 a year tax-free. When you withdraw money from your investments or sell shares, there is no tax payable on the income (dividends) or capital appreciation (share price increases). For those of you considering your long-term financial planning, ISAs do fall within your estate for inheritance tax. If your estate exceeds the inheritance tax threshold, the ISA may be subject to a 40% tax on your death.

Investing outside of an ISA or SIPP means you may be subject to dividend and capital gains tax. To learn more about the tax implications, click on the link below:

Some illustrations

Below are illustrations comparing the results of different monthly investment contributions, with indicative long-term investment returns over different periods, plus the estimated equivalent amount in today’s money. The figures are based on the assumption of a 7.5% return on investments and an annual inflation rate of 2.5%.