Who wants to be a millionaire? It’s a rhetorical question many Isa providers like to pose at this time of year to persuade people to invest with them before the tax-year ends – or as the next one starts.
Let’s be frank though: it’s not a feasible target for most of us.
But what about accumulating, say, a quarter of that – £250,000 – with a stocks and shares Isa?
Stow it away: Most of us can’t put £20,000 into our Isa savings pots each year
If you are fortunate enough to be able to put away the £20,000 permitted each year under current Isa rules, you’d probably be able to get to million-pound-nirvana in fewer than 26 years, based on our current projections for net market returns at Vanguard – and fewer than 17 years if there are two of you.
We also know that it could take even less time if shares perform better than we expect or, conversely, more time if they fall below par or your Isa provider charges you more for the privilege of investing with them, such is the power of compounding.
But most of us just aren’t fortunate enough to be able to put away such large sums of money. So, we want to drill deeper, just to show what is possible for a wider range of people.
Yes, it’s still a huge ask, and, yes, it’s probably getting harder for younger people to build a significant nest egg because of the high cost of housing, traditionally the main source of family wealth.
But for a still-significant chunk of society, amassing serious money through your tax-efficient Isa is probably more attainable than is commonly imagined.
There’s just one catch: you have to save regularly, start early, and also invest those savings rather than leave them sitting in a bank savings account, or even a cash Isa.
Take the following three examples. As above, we assume an average annual net return on global shares of five per cent.
This is in keeping with Vanguard’s own projections for the next decade or so, but a little less than how they have performed over the past century and less than half the annualised performance of the past 10 years.
Attainable: Amassing serious money through your tax-efficient Isa is probably more attainable than is commonly imagined
How three different people could become Isa quarter millionaires
Here are three theoretical but realistic examples of how to invest your way to success.
Jessica has just turned 32. She works as a web designer and can save £500 a month in an Isa.
She can increase the amount she saves by 2.5 per cent a year. Under the circumstances described it would take her just under 20 years to hit the £250,000 mark, which is roughly a quarter of the average life expectancy of a British man (79.2 years) or woman (82.9 years).
So she’d be a quarter-millionaire by the age of 52, just through her Isa savings.
Unimpressed? OK, well imagine Jessica fell in love with Frankie, and they each saved at the same rate and tied the knot.
Using the same assumptions, they would arrive together at the magic quarter-million-pounds Isa figure in roughly 13 years. And if stock markets performed better-than-expected, say by eight per cent a year instead of five per cent, it could take them even less time – just 11 and a half years.
Note here the adverse impact of costs: if an Isa provider had charged an extra 1.5 per cent a year it would have taken Jessica nearly two years longer to reach her goal.
Watch out: It’s important to emphasise that the value of investments can go up and down
Amit is 25 and a sales consultant. He’s still paying off his student debt, still living at his parents’ house to save money but able with his new job to put aside £350 a month in his Isa and reasonably confident of increasing the amount he saves by five per cent a year.
His bonus prospects are good, after all. Based on our core assumptions, Amit would not have reached his 38th birthday by the time he saved £100,000 and would be 46 by the time he reached £250,000.
And of course, if Amit also found a life partner with a similar Isa habit, they’d be able to get there significantly quicker.
And finally we have Jade, a much-in-demand software engineer already able to take home more than £3,000 a month at the tender age of 28 who lives in a flat share with friends.
As a result, Jade can save £1,000 a month in an Isa and also increase that amount by five per cent a year. Based on our core scenario, Jade would be an Isa quarter-millionaire before hitting 40.
Now it’s important to emphasise that the value of investments can go up and down and that these are just imaginary examples based on long-term historical returns and projections.
Also, the assumptions we’ve made may have some bearing on your personal circumstances or none at all.
But I still hope that they show how hitting £250,000 is within reach for more people than is commonly assumed.
Just think what you could do with such a large sum of money.
James Norton is senior investment planner at Vanguard UK.