Millennial to millionaire – a four step ISA plan

Long term savings might not be a top priority for millennials, with paying of student loans, starting a career and getting on the housing ladder all vying for attention, but starting the savings habit as early as possible means even modest amounts put aside each month can turn into a fortune with the magic of compound growth over the years. 

Individual Savings Accounts (ISAs) and particularly the Lifetime ISA are a good option for millennials because they are simple, tax efficient and offer a Government bonus for people under 40. 

The table below shows how much millennials need to start saving per month to become an ISA millionaire by the time they are 65:

This assumes they increase contributions each year in line with the Government’s long term inflation target of 2% and take advantage of the Government bonus available via the Lifetime ISA as much as possible, using a normal ISA once they have exceeded the LISA limit.

This example uses the average total return (with dividends reinvested) of the MSCI world index of 11% per annum, with 1% deducted for charges (ie 10% net return per annum).  If this feels too optimistic for future returns, the same result can be achieved assuming a 6% per annum investment return post charges with higher contributions per month:

Laura Suter, personal finance analyst at investment platform AJ Bell, outlines a four step plan that can help millennials become millionaires:

“The beauty with ISAs is that once money is in the account there is no income or capital gains tax to pay so they are a simple way to save for the long term.  The money can be accessed at any time should you need it but if you can leave it untouched and be patient it is possible to turn yourself into an ISA millionaire following these four steps.  

1. Start early 

“ISAs are not a get rich quick scheme but they can help you create a fortune if you contribute regularly over the long term.  You can put a maximum of £20,000 a year into an ISA, of which £4,000 can go into a Lifetime ISA and be eligible for the 25% Government bonus. This is likely to be beyond the reach of most millennials but the key is to not be daunted and just start saving as much as you can.

“The good news is that if you start at a young age and be patient, your savings will benefit from compound growth, which is when your savings grow each year and then in future years you get growth on that growth.  As the example shows, the later you leave it the amount you need to start saving quickly ratchets up.”

2. Increase contributions as earnings grow 

“The key here is to invest what you can realistically afford and increase that gradually over time.  No one wants to invest so much that they don’t have any money left to live life today.  Start with what you can afford and use pay rises, bonuses and other windfalls such as inheritance to top up your savings when you can.  The Government’s long term inflation target of 2% is a good figure to aim for in terms of regular investments because hopefully you are just increasing your contributions as your pay increases.  Any further money you invest will get you to your goal quicker.”

3. Get some help from the Government

“The newest member of the ISA family is the Lifetime ISA which offers a 25% Government bonus.  You have to be under 40 to open a Lifetime ISA but if you are eligible and are happy to keep your money working for you until at least 60 the Lifetime ISA can turbo boost your ISA savings.  

“Up to £4,000 a year can be invested in a LISA, giving a maximum Government bonus of £1,000.  The examples we have used assume millennials use the LISA as much as they can, with any contributions over the £4,000 a year limit being invested in a normal ISA.  The value of the Government bonus, including investment growth, can be substantial.”

10% growth per annum:

6% growth per annum:

4. Take some investment risk 

“Choosing how and where to invest your ISA savings has a significant impact on the amount of money you can accumulate.  With cash savings rates hovering around 1% to 2% a 22 year old would have to keep saving until they are 100 to become a millionaire (assuming an interest rate of 1.5% per annum).

“Investing in the stock market does involve taking risk but over the very long term shares have delivered very strong investment returns compared to other types of investment.  In fact the MSCI world index which represents the performance of shares around the world has delivered an average annual return of 11% over the past 40 years if you include all dividends being reinvested.  The FTSE all share which represents just the UK stock market has delivered slightly less at 9% per annum, but this is still very attractive.

“Over that time, shares might be volatile at times which means they can rise or fall quite dramatically in a relatively short period of time but one of the most valuable things millennials have on their side is time.  This enables them to take a very long term view and know that they can sit tight when things get a bit bumpy and ride out any short term market volatility.”