But don’t despair! Today, I’ll show how investing this exact amount every month into a Self-Invested Personal Pension (SIPP) can be the pathway to wealth, even millionaire status! Let’s start by revising a few facts about the SIPP. 

SIPP it to retire rich!

Anyone serious about growing their wealth for retirement should consider opening a SIPP. Like the Stocks and Shares ISA, this is a tax-efficient savings vehicle. It won’t involve paying capital gains tax on any profits made from the investments. There isn’t even any income tax payable on any dividends received from the stocks owned. Over time, this really matters.

There are a few other reasons for investing via a SIPP. Perhaps the most enticing of these is that any contributions made into the account qualifies for tax relief at a normal tax band. So, investors like me paying the basic rate (20%) will receive a 25% top-up from the government. In other words, £80 saved into an account becomes £100 after tax relief. 

Another positive is that I can save up to £40,000 in any one tax year. That’s double the ISA allowance!

£175.20 a month = retirement freedom

Back to the matter at hand. Let’s assume I’m saving the equivalent of the weekly State Pension (£175.20) into a SIPP every month. Thanks to the tax relief mentioned above, I would receive an extra £43.80 from the government, bringing the total monthly contributions to £219. Lovely!

Now, let’s assume I’m 40 years-old and I make these monthly instalments for the next 30 years. After all, there’s a possibility only those 70 and over might be able to access the State Pension by 2050. 

In 30 years, I will have saved a total of £78,840 according to my calculations. Let’s say this is invested this in the stock market and a penny wasn’t touched. I think I will be amazed by the results.

Wow! How much?

By 2050, that £78,840 will have grown to almost £175,000, assuming a 5% annualised return. As great as this sounds, the outcome could be even better if the chosen investments have performed well. 

A 10% annualised return would produce a little over £432,000 after 30 years. A 15% annualised return would make me a millionaire!

Of course, there are a few caveats. 

Keep costs low

Firstly, I must stress that there are no guarantees when it comes to returns. In reality, how much a person makes depends hugely on the age at which they begin investing and what they’re invested in. Small- and mid-cap companies tend to perform much better than big stocks over the long term, but they’re also far more volatile in the interim. 

Secondly, I’ve not taken account of any fees related to managing the SIPP, some of which will be unavoidable. Having said this, investors can keep costs low by not continually trading in and out of stocks. I’d just buy and hold.

In spite of these points, the numbers don’t lie. Look at how much money I could make by regularly saving into a tax-efficient account and trusting in the power of compounding!

I’d start investing the equivalent of the State Pension now and will be far less likely to be reliant on said State Pension in retirement.

The post Forget the State Pension. I’d drip-feed £175.20 a month into a SIPP to retire rich! appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

1. SIPP it

As much as we love the standard Stocks and Shares ISA at the Fool UK, we’re just as positive about another tax-efficient account — the Self Invested Personal Pension (or SIPP). As its name would suggest, this savings vehicle is ideal for those whose goal is to build a big nest egg for their golden years.

The great thing about the Self-Invested Personal Pension (SIPP) over the ISA is that it forces you to focus on the long term by preventing you from accessing your money until the age of 55 (rising to 57 from 2028). An ISA, on the other hand, can be raided at whim, which isn’t really conducive to generating wealth for retirement.

Another benefit of the SIPP over the standard ISA is that the government pays tax relief on any contributions you make. Pay in £800, for example, and you’ll receive an extra £200 to invest (assuming you’re a basic rate taxpayer). You can also pay in double the amount you can into an ISA (up to £40,000), although be aware that this allowance may change in the future. 

2. Make time your friend

If you want to make it to millionaire status, you need to make the most of what Einstein supposedly labelled the eighth wonder of the world: compound growth (or interest on interest).

To give you an idea of just how impressive compound growth is, £58,000 will, after 10 years be worth over £150,000, assuming an optimistic-but-not-impossible average annual return of 10%. After 20 years, it will be worth slightly more than £390,000. Stay invested for 30 years and you’ll have over £1,000,000.

To generate this kind of return in reality, however, you’ll need to be comfortable with having most of your cash tied up in stocks. This is vital since equities have consistently been the best performing of all assets over the long term.

To be clear, the longer you stay invested (and the more you save), the better your chances of retiring a millionaire.

3. Become a millionaire on the cheap

Becoming a millionaire is all about learning to buy at the lows and sell at the highs, right? Ideally, yes. The easiest bit of investing advice to convey is, however, also the hardest to achieve in practice.

Very few people are able to get their timing just right; even fewer are able to do so consistently over years of investing. This is why we think it’s a good idea to buy regularly and automate the process as much as possible. Most investment platforms offer their clients the option to buy on a set day every month, thus avoiding the temptation to ‘time’ their purchases.

Another positive to doing this is that it keeps costs low at around £1 per trade (costs vary depending on which platform you use). That’s far better than paying the normal charge of around £10-£12. Over many years of investing, paying the latter can have a huge negative impact on returns regardless of how good a stock picker you prove to be. 

A smart (but always Foolish) investor always endeavours to keep costs as low as possible to reap the rewards further down the line.

The post 3 smart moves to help you to retire a millionaire appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Lindsell Train Global Equity Fund (one of several managed by Train) returned 272% from launch in 2011 to 31 March this year. Smith’s Fundsmith Equity fund returned 328% between November 2010 and the end of last month. Remember — these gains take into account last month’s dramatic market crash.

Many Foolish investors will prefer to pick their own stocks. Nevertheless, I think learning from both money managers could increase your chances of obtaining great wealth.

Buy class to retire richer

Although they’ve no affiliation, Train and Smith have very similar investment strategies. Just like Warren Buffett, both look for high-quality companies. These tend to generate big returns on capital employed. In other words, they make great money on the money they invest in themselves. 

Train and Smith also look for businesses with compelling brands. Naturally, they don’t hold exactly the same companies in their portfolios, but many come from the same defensive sectors, namely consumer goods, software, and healthcare.

In addition, these managers embody the idea that knowing everything about a small bunch of great stocks is far better than knowing little about a lot. Their portfolios contain 20-30 companies. I believe private investors should only invest in their best ideas too if they want to outperform benchmarks like the FTSE 100 and potentially retire early.

Avoid the rubbish

It’s a testament to Train’s and Smith’s stock-picking abilities that their funds have done relatively well during the pandemic. The former’s fund declined just 3.3% in March, while the latter’s fell 3.7%. Their benchmark dropped 10.6%. 

I think this can be attributed not only to their love for great companies but also their aversion to simply buying what’s cheap. As Smith remarked in his recent letter to shareholders: “Shares in companies that are lowly rated are so mostly for good reasons.”

This observation is so important to grasp right now. With many stocks (good and bad) still reeling from the crash, it’s vital to get under the bonnet of each potential investment and check its fundamentals. Companies usually stay ‘cheap’ if they’ve too much debt, can’t grow, or struggle to make a profit.

And it goes without saying that ‘quality investing’ is far less risky than buying a basket of penny shares.

Don’t meddle

When Train and Smith buy, they do so with the intention of holding for the very long term, unless something changes in the underlying business. A market crash doesn’t faze them. As a result, both funds have exceptionally low turnover rates relative to other funds.

Such inactivity might be too much for private investors managing their own money for retirement. But it’s worth remembering that frequent buying and selling only guarantees higher costs, nothing more. 

Retire rich

Of course, you could just invest with Smith, Train, or both, and be done with it. Those that dislike management fees, however, might simply want to apply the principles these professional money managers abide by instead.

The next few months could see a resumption of volatility in markets. Buy and hold great stocks at reasonable prices and the dream of a golden retirement could become a reality. 

The post Why I think following Nick Train and Terry Smith could help you retire rich appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today I’m going to talk about the one thing all new investors must learn and all experienced investors must remember. The fact that we’ve just experienced the worst quarter for stock markets since 1987 makes it even more relevant.

The most important thing

Forget all the fancy money-making strategies you’ve heard. To really increase your wealth, it’s more important to understand the concept of ‘compound growth’.

We experience compounding in everyday life, usually without even recognising it.

Suppose you want to get fit and decide to dedicate 10 minutes a day to exercising. Initially, progress is slow. Over time, however, workouts become easier and your body can do more.

The reason for this is simple: every bout of exercise builds on those previously completed. 

Compounding can work against us too. Allowing ourselves an extra portion of something calorific at dinner might not feel wrong at the time. The result of doing so many times over many evenings, however, eventually shows on our waistline. 

The little things we regularly do add up.

So, it can make me rich?

Yes. Compounding is the not-so-secret sauce that can also make you wealthy. 

Imagine investing £20 in the stock market every month (or £240 per year) for the next 30 years. Over this period, markets rise in value and you re-invest any dividends you receive.

Although the actual rate of return will vary from year to year, let’s say your portfolio returns 10% per annum. So, after one year, your money increases in value by 10%. In the second year, the money you had after the first year increases by 10% and so on. 

After 30 years, you’d have nearly £40,000. It’s grown by so much because you’ve earned interest on interest every year. Your money has compounded. 

Remember, this is the hypothetical result of investing just £20 per month. Put away £50 a month and you’ll have almost £99,000 based on my figures. £100 a month will give you over £197,000. It’s not magic, it’s simple maths. 

The only caveat is that there’s no guarantee the stock market will return that 10% average per year. It could be lower or higher, depending on what you choose to invest in and how those investments perform. 

Dedication required

Compounding can make you rich, but it still requires two things from you: commitment and patience.

Just as practicing the violin once every year won’t lead to any meaningful gains in terms of ability, saving ‘when you feel like it’ is unlikely to substantially increase your wealth.

This is why setting up a direct debit to take even a small amount of money from your bank account to your ISA every month without fail is crucial. By automating your savings, you take out the need to be motivated to save.

Second, learning to delay gratification is vital. Warren Buffett’s wealth has increased massively in later life because he recognised that results aren’t immediate. He continued to invest, through good times and bad. 

Which brings me back to the start. Having the courage to invest through market wobbles is desirable since it allows you to buy more when prices are depressed. The more stock you accumulate at lower prices, the greater the eventual upside will be.

Forget the market crash. Remember the power of compound growth.

The post Forget the stock market crash. Knowing this could help you retire rich appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.