I’d invest £12k a year into a Stocks and Shares ISA to aim for a £1m portfolio

The Stocks and Shares ISA offers a brilliant opportunity to build long-term wealth free of tax. It’s even possible to make a million

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Having a £1m portfolio at retirement sounds brilliant and if it’s saved inside a Stocks and Shares ISA that’s even better because it’s all tax free. Sometimes I don’t think we Britons realise how lucky we are. Few countries have anything to match it.

Yet building a million-pound portfolio isn’t easy. Only a few thousand ISA investors have done it, and the tax-free wrapper has been available since 1999. On the other hand, it’s easier than it was, with the allowance now £20,000 a year. 

Something to target

Somebody who invested their full allowance every year and generated the average long-term total return on the FTSE 100 of 6.89% a year would get there in 21 years. By then, they’d have a hefty £1.03m, by my calculations.

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Thanks to inflation, that money will be have less spending power than today. But should still fund a decent retirement on top of whatever the State Pension pays then, plus any other workplace or personal pension.

Not everybody can afford to invest their full £20k ISA allowance, especially with a cost-of-living crisis raging. I certainly can’t. However, it’s still possible to hit that target by investing smaller, regular sums, and sticking with it.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Let’s take a monthly investment of £500 as a nice round number. Now let’s assume I increase it every year by 3% to maintain its value. If I kept that going for 25 years, I’d have £526,900. That’s a lot of money, but it isn’t £1m. 

To achieve my ambitious seven-figure target, I’d have to either change my timescale or raise my contributions. On the first measure, it would take me 33 years to hit £1m by investing £500 a month (plus that 3% annual uplift). By then, I’d have £1.05m.

Time isn’t totally on my side

Sadly, I don’t have that long. If I was still only 35, I could do it at some point in my 67th year, just in time for retirement. Sadly, I’m older than that.

If I could increase my contributions to invest £1,000 a month – or £12,000 a year – then it would take me 25 years to hit a million.

Many people view investing as a get-rich-quick game, but as my rough-and-ready calculations show, it’s more a case of get rich slowly (but steadily). Starting early in life helps. Either that or start later, and throw the kitchen sink at it.

I’d shift the odds in my favour by buying individual FTSE 100 stocks rather than simply following the index with a tracker. I’d build a balanced portfolio of at least a dozen stocks, to spread my risk. This might include income and growth shares such as Ashtead Group, Bunzl, Diageo, Smurfit Kappa Group and Unilever.

I would supplement these with some of today’s highest yielding FTSE 100 stocks such as Aviva, Barratt Developments, Lloyds Banking Group and Rio Tinto. Currently, they all pay dividend income of more than 7% a year.

Neither dividends or growth are guaranteed of course, and stock markets can be highly volatile in the short term. However, as I’m investing for the long term, I have time to overcome short-term turbulence and give myself a shot at a million. Even if I don’t quite make it, I’ll still be a lot richer than if I’d never tried.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in Lloyds Banking Group Plc, Rio Tinto Group, and Unilever Plc. The Motley Fool UK has recommended Bunzl Plc, Diageo Plc, Lloyds Banking Group Plc, and Unilever Plc. 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.

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