For many investors, the long-term goal is to retire comfortably at 65 or younger. Clearly, one person’s idea of what ‘comfortably’ means will be different from another’s, but a sum of £1m is probably enough for most people to enjoy their retirement. After all, with the FTSE 100 yielding over 3.5% right now, it means an income of almost £3,000 per month, plus capital growth that’s likely to beat inflation over the long run.
Of course, the difficulty in most people’s eyes isn’t in deciding how much is needed to retire comfortably, but rather how to reach that point. This is where the returns of the FTSE 100 and the power of compounding make a huge impact on any retirement goal.
Since its inception in January 1984, the FTSE 100 has risen from 1,000 points to around 6,900 points today. That’s an annualised gain of 6.1% and when dividends of around 3% per annum are added to that figure, the total return from the FTSE 100 since 1984 has been 9.1% per annum. This means that £10,000 invested in the FTSE 100 in 1984 would now be worth almost £170,000.
Modest investment
Clearly, that’s shy of the £1m target, but investing a relatively modest amount each week over the same time period would have boosted the end figure so that it’s over £1m. For example, investing £100 per week since the FTSE 100’s inception would equate to an end figure of £955,000. When added to the £170,000 from the initial £10,000 that takes the total figure to £1.125m.
Investing in this manner would require an individual to start at the age of 32. The average salary in the UK is £27,000, so saving £100 per week would equate to just under 20% of gross earnings. Even without the £10,000 initial lump sum, it would require less than another year of returns to push past the £1m level. In other words it would mean starting at age 31 rather than 32.
Of course, the FTSE 100’s returns aren’t consistent and can be highly volatile. This may tempt investors to seek to trade shares so as to buy low and then sell high. While this strategy makes sense in theory, the reality is that guessing short-term share price movements is incredibly challenging and time intensive. Therefore, it makes sense to simply buy and hold shares for the long term and potentially pick up an annualised return of 9.1%.
It’s possible, though, to beat the FTSE 100 in the long run. Selecting a diversified range of good value, financially stable companies that have competitive advantages over their sector peers is a proven strategy to beat the index. It may not do so in every year, but investors such as Warren Buffett and Neil Woodford have enjoyed huge success by adopting this (or similar) strategies.
So, while achieving a goal of retiring with £1m at the age of 65 may seem rather lofty to some investors, the reality is that anyone can do it. Certainly, it requires the ability to save a proportion of earnings each month as well as the time for compounding to have a significant effect on its value. However, the real skill is in being disciplined in terms of picking attractive shares and simply letting them make money for you.
