A rising number of young people no longer want to work until the state pension age – but how much is enough to retire on?
Many savers settle on a target of £1million as being enough to stop work, and those aiming for early retirement will often take advantage of ISAs to achieve this.
Data suggests young people are far more switched on to money matters than the avocado-bashing headlines might have you believe, with around 14% of 18 to 24-year-old savers expecting to have accumulated £1million by the time they retire.
‘I enjoy work but I want the financial freedom to do whatever I want and I don’t want to be working until my late sixties,’ says Matt Roberts, 28, a scientific researcher living in the East Midlands who is hoping to hit those numbers.
The aim of retiring early is a key reason why many young people are turning to investing. The state pension age is currently 66, rising to 67 over the next few years, and it is expected to rise even further in decades to come.
If you’re saving for a long-term goal – perhaps early retirement, a larger house or a holiday home – investing in the stock market can provide much bigger rewards over time than putting your money in a cash savings account with a high street bank.
For retirement savings, the obvious way to invest your money is through a pension. You will benefit from tax relief (the Government boosts your contributions by at least 25% and more if you are a higher-rate taxpayer) and if you are employed, your employer will also make contributions.
However, the downside of a pension is that you can’t access your pot until age 55, rising to 57 from 2028 and that is likely to rise again in the future.
If you want to withdraw money before this, you will face a significant tax penalty of up to 55%.
This is where a stocks and shares ISA can be useful. You can withdraw money held in an ISA whenever you like, and this is why they are favoured by savers looking to retire in their early fifties or perhaps even their forties.
Matt Roberts pays £550 a month into his ISA – which is currently worth about £20,000 – and he is aiming for 9% growth on his investments a year.
If he can sustain this and his investments perform as well as hoped, his pot would hit around £1million at the age of 55.
At this point, the aim is that his investments will pay enough dividends to provide him with an income so he can stop work.
Dividends are payouts to shareholders from a company’s profit. They are typically paid in cash every quarter. Matt currently earns around £30-40 a month from dividends, and he is reinvesting these to boost his pot in the long term.
The companies currently paying the highest dividends in Matt’s portfolio of 55 firms include Shell, BP, Rio Tinto and National Grid.
‘My investment goal is to make an income through dividends,’ says Matt, who started investing two years ago. ‘I am making a small amount each month but it is growing all the time and one day this will allow me to stop work.
‘I also pay into a pension through my employer and I’m looking into opening a separate private pension. I feel more confident with investing now I have learned the basics through my ISA.’
Around 46% of people aged between 18 and 24 said investing in their ISA was a priority, in a poll of 1,000 investment ISA holders by the Freetrade investment platform.
But many do not expect to get anywhere near the £1million mark, with the average pot expected to be worth around £200,000 by the time of retirement.
Simon Jones, chief executive of comparison website Investing Reviews, says hitting the £1million mark in an ISA would require a hefty financial commitment, taking 22 years if you paid in the maximum allowance of £20,000 a year and your investments grew by 7% a year.
If you are looking to withdraw an income from a £1million ISA pot, you can of course pay yourself as much as you like. But financial advisers typically advise you do not withdraw more than 4% a year to reduce the chances of running out of money if you plan to use this as a retirement income.
Based on withdrawals of 4% a year, a £1million ISA pot would give you an annual income of £40,000. This would be tax-free, as any returns earned through an ISA are free of income tax and capital gains tax.
Sarah Coles, a personal finance analyst at investment platform Hargreaves Lansdown, says the vast majority of ISA millionaires don’t take enormous risks.
They’ve built their fortune by consistently investing as much as possible of their £20,000 annual allowance every year in a diverse and balanced portfolio that’s likely to include a range of individual company shares, as well as some investment funds.
Popular shares held by ISA millionaires include BP, National Grid and Unilever, while popular funds include Fundsmith Equity and Lindsell Train Global Equity alongside tracker funds such as iShares FTSE 250 Index and Legal & General’s European Index.
‘The dream of becoming an ISA millionaire is a very long-term goal,’ adds Matt. ‘Like a lot of young people, I started taking a bigger interest in my finances during lockdown. I don’t want to be still working when I’m 65 if I don’t have to and it would be nice to have the option of retiring early some day.
‘I don’t plan on withdrawing any money from my stocks and shares ISA until then.’
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