To say that you’ve retired age fifty-five with a million pounds in your bank account is the dream of many students that leave school to start in their career.
Remember, just because you aim to have a million pounds in your bank account, doesn’t mean the only way to achieve this goal is by having one massive paycheck, or even a large salary. Many people have achieved this goal by naturally growing their income, saving and investing it over the long term.
One point we should make early on, other than the bank of Mum & Dad, there are no shortcuts. You’ll need to focus on a few critical areas in both your career and your home life, but if you follow some essential advice, building a bank account of a million pounds, is not very difficult. Here’s what you need to do;
In your 20’s, you need to focus on three areas. Your career, income streams, and paying off any high-interest debt that you’ve accumulated during your education. If you’re anything like me, you’ll have a student loan, an overdraft and possibly a bank loan.
While you’re studying, all of these are interest-free; however, once you’ve left University, the charges start to mount up quickly. My overdraft went from being interest-free to over 18% per year. The smart move is the pay off these loans as fast as possible, but also to manage the interest rates. There is no point in paying 18% for an overdraft when you could take out a personal loan and pay 4%.
Your career is critical and these early years, especially so. The idea is that you need to become an “Expert” in your field. By becoming an expert in your field, you’ll guarantee that later in life, your earnings will be significant.
Remember, you’ll be paid more if you’re an expert in your field, than if not. Your 20’s are the time when you develop the skills needed to become an expert later in life.
Initially, any savings should be going towards pay off your educational debt, starting with the high-interest debts first. Low-interest debt is not such a concern and will require a decision to be made on whether you invest, or pay this debt.
On a personal basis, when I left University, I had a large student loan, but the interest was minimal and only required me to pay 9% of my income towards my student loan. This allowed me to invest my savings and create wealth.
The crucial second focus during your 20’s needs to be saving as much as you can. As an absolute minimum, you need to be saving 20% of your income, however, this can be taken the extremes – The FIRE retirement program.
Your 20’s are a great time to save money and start those retirement plans. It’s one of the very few times in life when you have minimal expenses. Financial advisors typically recommend that you take 20% of your salary and transfer it directly into your savings. Ideally, this should happen automatically. This way, you train yourself to live a conservative lifestyle and begin your savings for the future.
Invest Your Savings
Once you’ve paid the debts, next, you need to start building your savings and start creating wealth. Remember, becoming a millionaire is not going to happen overnight and require years of regular savings and compound interest.
In your 20’s is the time to take risks on the stockmarket. This doesn’t mean that you should be going out and borrowing money to invest, but taking the additional risk by buying the latest IPO is not going to hurt you in the long term.
In an ideal world, you should be looking to generate a return of 10-15% on your money. If you saved £200 per month from the age of 23 to the age of 53 (i.e. 30 years), with compound interest and an interest rate of 10% (which is very achievable), you’d end up with £506,000 by your 55 birthday – over halfway to becoming a millionaire.
I’m a great fan of self-investing. Personally, the damage that a financial advisor does by charging fee’s does not out way the mistake you’ll likely make, by investing yourself.
If you meet with a financial advisor and sign up for a self-invested retirement plan, you’ll likely pay 1.5% annual management fee for the plan and another 1% to the financial advisor.
If we use the above example and imagine you’ve invested £200 per month, from the age of 23 to 55 years old, you should have £506,867 in your bank account. If you’ve used a financial advisor and you’re paying 2.5% for the pleasure, that same investment would only grow to £343,104. The financial advisor would have cost you a massive £179,370 over the 31 years.
If you opened a share-trading account and bought £200’s per month of an FTSE 100 ETF, you’d generate xxxxxxx
To generate wealth, you need to build more than one income stream. Across this website, we talk about creating multiple streams of income. The idea here is that multiple streams of income will generate free cash flow that can be used to pay debts, and add to savings leading to increased compound growth of your investment.
Your 20’s is the best time to put this plan into action. What side gig’s could you do?
Your 30’s is typically when life becomes a little more complicated. If you’ve concentrated on your career, you should have been promoted into middle management, and your salary should’ve started to increase.
The bad news, your 30’s is also the time when you need to raise cash for the deposit on your first house, pay for a wedding and start paying for children. Typically, this is the decade when life starts to get more expensive, and your finances begin to be put under strain.
It’s important to remember your saving for the future.
The Damage You Could Do
If you’ve been saving for the last few years and have a small investment portfolio, this is not the time to dive a use it for that one-off bill. Yes, weddings are expensive, but your saving for your future and to one day have a million pounds in your bank account. If age 30 you decide to spend your savings on a wedding, for example, and must start from scratch with your savings, the effect is scary.
If you saved £200 per month between the age of 23 and 55 (i.e. 33 years), with compound interest and an interest rate of 10% (which is very achievable), you’d end up with £506,867 by your 55 birthday.
If aged 33, you decided you wanted to liquidate your retirement portfolio, you’d be able to take out £46,699. However, the damage you’ve done to your retirement portfolio will be detrimental to your future.
Your portfolio will now start from zero. The £200 per month that your investing will now only become £161,283. Worse still, if you want to take it to the £506,000 (only half the million we need) with the same 10% return, you’ll either need to carry on working until your 65 years old (another ten years) or triple your monthly premium to over £1,000 per month.
Living Below Your Means
In your 30’s, people tend to start making more money. If you’re getting married, you can now look at the total of two incomes, now that you have two earners in the family.
This often means that people start living way above their means and enjoying the lifestyle they’ve created. If you want to become a millionaire, rather than living the life with your now improved finances, you need to make sure you’re saving this disposable income.
If you’ve been saving £200 per month between the ages of 23 and 32 (ten years of investment), and it’s grown by 10% per year, you should now have savings pot of £40,162.
With your promotions, your dual income, you should easily be able to increase this to £500 per month. The effect is massive, now by the end of your 57th year, you should now have a million in your bank account – £1,072,436
If you can increase this number further to say £750 per month, it means that at the end your 54th year, you’ll have £1,025,251 in your bank account and if you invested £1,000 per month, to 52 years old where you’ll have £1,019,349 in your bank account.
Remember those side-gigs that you started in your 20’s. If you’ve kept at it, and made it work, not only will you have an income, but you could also have an asset that’s worth something.
On a personal basis, my side-gig was websites. I built a website about my hobby that in its hay day was making around £3,000 per month.
It took a lot of work, many late evenings and weekends, but the results were worth it. The money I earned from the website was used to pay off my debts from University and bolster my savings. After running the website for a few years, the hard work paid off, as I managed to sell the site for over £50,000, which I used as the deposit on my flat.
Maximise Employer Contributions
In the UK from the age of 22, if you’re earning over £10,000, you’ll be enrolled into a workplace pension scheme to start saving for retirement. Currently, 8% of your total monthly salary will be put towards your retirement – 5% of your salary and 3% matched by the employer.
Remember, that 3% match by the employer is free money and potentially it could be much higher. Often companies will match your contributions to an upper limit. If this is the case, make sure you take advantage of it.
It’s essential to make sure you aware and taking advantage of any tax-free saving plans you have access to. In the UK as it stands today in 2019, you’ll pay no tax on the first £11,850, 20% on the next £11,851 to £46,350 and 40% on the next £46,351 to £150,000 and 45% on anything above 150K.
The problem comes if you’re running a self-invested pension scheme and are 15 years into saving your £400 per month. You’ll have some where in the region of £180K. If 2020 is anything like 2017 and returned 15%, you’d have made close to 27K which could easily put you into the 40% tax bracket. Imagine loosing 40% of your hard earned profit.
The UK has three tax-free saving plans that you need to take advantage of. Cash ISAS that allow you to save upto £20K with no income tax, Stocks and shares ISAS which has the same 20K and no income tax, and a Lifetime ISA that is a longer-term tax-free savings account where you can save up to £4,000 per year (excluding a government bonus of 25% up to £1,000) depending on your tax rate. Its income tax-free, however, it’s designed so that you cannot access your money until you hit 60 years old.
You’re early 30’s is typically when you start building your debt. I bought my first house in my thirties. Most of my friends did the same. Firstly, make sure you get your sums right when you start taking out debt.
I’ve had to organise loans for a lot of clients over the years who’ve spent the maximum they were allowed on a mortgage, but forget about the cost to buy, property alterations and new furniture expenses.
You also need to focus on how much your mortgage is going to cost over the years. Often people are lured in by the flashy super-low introductory rate, only to find out it suddenly disappears, and the new rate is not competitive and worse still, there’s a price to change to a different company.
Get a mortgage wrong, and it could end up costing you thousands of pounds over the years.
Typically, three things happen in your 40’s. You get close to your peak earnings, children start to make a dent in your monthly expenditure, and for the majority of us, you begin to think about your future more seriously.
One point to make early on, I hope you’ve taken the advice above and started saving for your retirement. If you haven’t and are one of the 25% of adults over the age of 40 who has no savings, don’t worry. It’s not impossible to retire a millionaire, but you might have to delay your retirement for a few years.
To retire a millionaire aged 55, you’d need to save £2,500 per month and make sure it grew by an average of 10% each year. If you could delay your retirement until you were 65, this figure drops to £800 per month.
Your 40’s should be your peak earnings where you earn the most throughout your career. Most people assume it’s their 50’s where they’ll make the most, but very often this is not the case.
The problem in your 40’s is that you’ll earn the most, but you’ll also spend the most. Children start to get expensive, and typically there is more pull on your finances to spend on holidays. The important thing in your 40’s is not to overspend. You need to keep your finances in check and make sure you’re saving towards your future.
Your early 40’s is your last chance to think hard about your retirement and make sure you’re heading along the right path. I hope you’ve been saving for your future and have a good start towards your retirement pot. That said, if you haven’t, now’s the time to get serious.
I’m a great fan of not paying financial advisors for advice in the early years where you’re trying to grow assets. I feel that if you can follow some fundamental information, and stick to it, the benefits of using a financial advisor, do not make sense.
That said, in your 40’s, it’s worth seeing a financial advisor to make sure you’re on the right track with your retirement plans. There’s no point saving all this money towards your retirement, only to find out that you got your maths wrong and your 500K short.
I would also be asking financial advisors about insurance and what you need to protect yourself and your family. You need to make sure you’ve got adequate health insurance, life insurance and disability insurance to cover both you and your family.
The road to a millionaire is likely to be for you and your family. If you’re the primary bread earner and something happens to you, you need to make sure that road does not stop.
If you have children, I would make sure you have term life insurance and disability insurance for the duration of the time that your dependents will rely on you financially. This way, as long as you pay the premiums, you’re covered if anything happens to you.
NOTE – Make sure you have a will.
Any spare money you have at the end of the year needs to be invested into the stockmarket either through a direct share platform, or a SIPS (self-invested pension scheme), however, watch out you don’t take on extra risk trying to make higher returns.
Your 40’s, is not the time to up the risk factor on your investments. Yes you could make a higher return, but you could also loose a substantial lot more. In your twenties, you can take a major risk on emerging markets or the latest IPO, knowing that if it goes wrong, you have time to recover. In your forties, this is not the case.
A 30% loss in your investment portfolio could easily mean an extra five years working while you try and make up for the loss.
The Wife’s Side Gigs
In your 30’s when the children are young, you either have a choice of asking one parent to stay at home to look after the children, or you both work and pay for childcare. Often, it’s the wife who loses their career for the sake of the children.
In the early years, this is no problem. Looking after two children under six is a handful. The problem comes when the children go to school, leaving the wife at home with nothing to do.
There are options to go back to study and re-train. There are also those side-gigs that you’ve been working on throughout your life that could come into play. If you don’t have a side-gig, check this blog post out where we look at 100 ways to make money.
If you do, now’s the time to pass it over the wife. She can work at home, building out what you started.
These should be your golden years, the children have gone or at very least, going, the pension is looking good, and any savings can be used to make further dents into the mortgage. However, all too often, life takes a turn for the worse and becomes more complicated than we expected.
If you’ve taken on board the advice above, you could be very close to having the option to retire or at the very least, choose whether you want to work.
If you’ve been investing your £200 per month (which you’ve then increased to £500 per month), from the age of 23, and it’s grown by an average of 10% per year, compound interest will mean that you’ve got a pension pot of around a million pounds (at the end of your 54th year you should have £978,125, and by the end of your 55th year, this should be £1,085,058)
This, together with the money in your home, could allow you to retire and never work again. The million pounds in your pension pot would provide you with a £40,000 (pre-tax) income, while if you’ve managed to pay off a substantial part of your mortgage, would allow you to downsize to a smaller home, and live debt free.
Most importantly, it gives you a choice. Just because you’re now financially secure and could retire, doesn’t mean you have to. If you added another seven years of savings and compound interest to your retirement pot, you’d now have a pension pot of £1,630,959 which could equate to a Pre-Tax income of £65,238 for the rest of your life.
This time of life should be your peak earnings, however all too often, we’ve met clients who have been laid off due to their company downsizing or a recession and find it very difficult to get back into gainful employment.
If you’re still in gain full employment, enjoy it while it lasts. Sadly age discrimination is a real thing and in your late 50’s you’re likely to be discriminated against. Worst still, it’s also complicated to get a new job as companies feel that you will not be able to add value to their young, dynamic company.
If your job is going well and you’re still earning a salary each month, your focus needs to be paying off any debt leftover and bolstering your retirement fund. This is the last chance to save and pay off debt or support your retirement fund.
Once you’ve retired, your only other option to raise cash is a lifetime mortgage where you take equity out of your home while retaining ownership. The money is interest-free in the immediate term, however, interest is collected when the initial amount is collected on the sale of the property.
The idea is that you take the cash and pay off the mortgage or bolster your retirement fund and once you’ve finished living in the property either through moving into long-term care or death, the loan is repaid. This type of loan is something you must speak to your financial advisor regarding.
Your 50’s is not the time when you should be adding risk to your portfolio. Sadly, if it goes wrong, you don’t have the time to make it back up. As a consequence, you need to make sure your portfolio is both low to medium risk and full balanced across the bond, equity and commodity markets.
One point, its all very well reducing the risk out of your investment portfolio, but you need to make sure you’re still making a good return on your money otherwise you could run into inflation problems.
Inflation is the number one pension destroyer. It destroys your pension by reducing your buying power. As an example, something that cost £25,000 today will cost £41,015 in 25 years if you assume a 2% inflation rate.
UK State Pension
If you’ve paid 35 years or more of national insurance contributions each month and were born on or after the 6th April 1951 (or a woman born on or after 6th April 1953), you’ll get a full state pension.
If you have paid between 10 and 34 years of contributions, you will receive a proportion of the pension and less than ten years of NI contributions, you aren’t usually eligible for the new State pension).
If you haven’t paid the full 35 years, now is the time to make catch up payments to make sure you’re receiving the total amount.
Watch out your children don’t become financial dependant on you; otherwise, this can be a significant drain on your finances. We all want to do what’s right for our children, however, bailing your children out financially is not the right move and can have a detrimental effect on your own goal.
Your children can borrow money to go to University if needed, however, if you spend your retirement pot bailing your children out and then lose your job due to your age, life becomes complicated.
Protection of Assets
If you retire age 55 with a million pounds in your bank account, asset protection is going to be of high priority to you. This is something you need to speak with your financial advisor about, as it both, depends on the rules and the amount of money involved.
Sadly the rules that we have today for things life tax inheritance are likely to not be the same in ten years’ time when I come to retire. The specific areas you need to focus on include;
- Protecting assets from the tax man
- Make a Trust to minimise estate tax
- Make sure all your accounts have the correct beneficiaries
- Update your Will
- Protect your savings from institutional failure. Remember the government guarantees bank balances up to £85,000
- Financial gifts are inheritance tax-free (Subject to the 7-year rule)
If you’re retirement portfolio is looking short, maybe its time for side job.
Retirement at 55
Retirement at 55 or before is the target for me and a lot of people like me. With time, compound interest and following a few investment strategies and key goals, I will get there and you can to.
The next think to think about, once you’ve reached your target, do you want to retire and what’s best to do with your pensions.