The million-pound question every person needs to answer

I’ve got a proclivity for “bad” TV. Well, some call it “bad”, I call it a release. It’s the kind of TV you can sit down and watch and not have to think all that much.

The kind of TV where there’s no storyline to follow. Where you don’t need to have seen six previous seasons to know what the heck is even going on.

Some of these shows include things like Come Dine with Me, Gogglebox, First Dates, and a bunch of quiz shows like Tipping Point, Pointless (possibly my favourite of the lot) and Who Wants to Be a Millionaire.

Now, arguably some might think those quiz shows are the exact opposite of “not thinking that much”. But I disagree. You can watch them for the drama of other people floundering over quiz questions. At home, you either know it or you don’t with scant regard to the outcome.

Who Wants to Be a Millionaire is one of the best for this. And in my view gives you a very good analysis of the risk/reward view of the bulk of the general population. Not many get close to one million pounds in the quiz.

To be fair, it’s hard. The questions you need to answer get progressively more difficult. And so it should – ITV probably isn’t all that keen on giving away one million quid if it doesn’t have to.

But the idea itself is addictive. I mean, who wouldn’t want to be a millionaire? The fact the show even exists and is quite popular (regardless of the host) is an indication that most people want to be a millionaire.

For example, what if I said to you, tomorrow I will give one person £1,000,000 for doing absolutely nothing. How many people do you think would tip their hat in the ring to get that money?

Ed note: I’m not giving away £1,000,000 tomorrow.

My guess is that I’d get two kinds of people look at that. The kind of people that genuinely want £1,000,000 as it’s life-changing money. And there would also be the people that see it and do nothing, because they think they’ll never get it so why bother.

Now it’s pretty rare that you’ll ever get given £1,000,000 legitimately for doing nothing. But what if I told you that you could get £1,000,000 without too much effort?

Again, there will be two kinds of people that read that – some will be interested in how they could get £1,000,000 without too much effort, and those that think it’s not possible and it’ll never happen for them, so why bother.

Now if you think you’ll never get close to being a millionaire, then stop reading. This isn’t for you. But if you want to understand how a simple strategy can be put into place long term to open up the possibility to be a millionaire… read on.

How much do you need?

We know that most people will reach retirement age and not have anywhere near enough money in retirement. Instead they’ll be dependent on the state pension and maybe a trickle of savings accumulated over the years.

They will not be able to afford the lifestyle they had whilst working. And many will simply have to try and maintain work beyond retirement age just to get by.

What good is busting your backside for 40-odd years to have little to nothing to show for it at the end?

One of the biggest threats to the British economy long term, in my view, is people’s financial illiteracy and the attitude of living for the here and now – instant gratification.

In short, people are nowhere near prepared for the long term as they should be. But the worst thing about it is that little bits, with a smart strategy long term, can easily build up to a small fortune. Yet so many people do nothing about it.

According to Which, an annual household income of around £27,000 per year is needed for a “comfortable retirement”.

The full state pension is currently at £8,750 per year. So to get to just £27,000 per year you’d need another £18,250 just to get by. And that’s not even thinking about 30-odd years of inflation and the rising cost of living.

Still let’s say you retire at 65 and live to 95, that’s a decent stint. Just simple maths tells us that you’d need a lump sum of £547,500 to supplement the state pension to get your £27,000 per year.

Of course that’s not factoring in any interest you might earn with that money in a bank account. Still not many bank accounts pay over 1% interest at the moment. That’s because bank rates are so low.

The question is, at 65 will you have a lump sum of £547,500? For many people the answer to that is no. The other question is how far along are you to hitting your retirement lump sum goals?

What happens if you want to pull in £50,000 a year for 30 years post-retirement? Well, again not factoring in interest or other returns, that’s £1.5 million. Close to that?

Even just to hit £547,500 a 30-year-old would have to put away £15,642 in cash for the next 35 years to hit that figure. That’s £300 per week, every week, without fail for 35 years.

To get to £1,000,000 a 30-year-old would have to stick away £550 a week every week, without fail for 35 years.

For some, that might be doable. For most, it’s not.

So if the average person can’t save those figures for 35 years, how the heck can anyone even get close to becoming a millionaire?

I argue that anyone that’s earning an income today has a chance long term to become a millionaire. But you’ve got to be smart about it and you have to change your mindset.

The mindset needs to be, “I can become a millionaire so long as I follow my long-term strategy and make my money work for me.

There’s nothing wrong with being rich, there’s nothing wrong with being a millionaire. There’s nothing wrong with not having to rely on the state for retirement income. It’s just whether you want to be like everyone else and think it can’t happen to you, or do something about it now and have no worries later.

The numbers – how to become a millionaire

According to information from the “Credit Suisse Global Investment Returns Yearbook 2018” global equities (stocks and shares) averaged a bit over 5% real returns from 100 to 2017.

Now that might not sound like a huge return. And it’s not. But it’s far better than the 0% that cash does for you right now.

Understanding how different asset classes work is important if you want to climb your way to becoming a millionaire. Stocks and shares are, long term, the best asset class for growing your wealth.

Yes there are risks, prices go up and down, and there’s no guarantee your investment in “Company A” will be worth more than what you paid for it. But with the right diversified selections, there’s the potential to achieve average returns of around 5%-5.5% every year, long term.

Now let’s say you could get on average 5.3% return for the next 35 years on your investments. In addition to that you were regularly adding money to these investments. And over time you were building up slowly but surely a big ol’ pot of money for retirement.

If you started with just £1,000 and started adding £50 per week getting 5.3% per year after 35 years, you’d have £250,691. Bugger, that’s not quite £1 million. But it easily gets you to that “comfortable retirement” figure that Which suggests people need. So that’s a start.

But remember you want to be a millionaire.

If you bumped that weekly contribution amount to £75, then in 35 years at the very conservative 5.3% per annum you’d end up with around £373,089. An extra £122,000 just for slightly higher regular contributions.

Now what does that look like if you were able to achieve a higher average return on your investments?

An 8% average annual return puts that figure at £686,820 after 35 years.

But if your investments can average just 9.65% per year after 35 years that figure hits £1,000,595.

Let’s recap that…

£1,000 starting amount. Then £75 per week ongoing. And aiming for a 9.65% annual average return on your investments. Do that over 35 years and you could end up with £1,000,595. You just became a millionaire.

The thing is as well is that there’s a good chance your earning capacity increases over time, so that £75 ongoing contribution becomes easier and easier to manage. In fact, over time you might even increase that regular contribution and get to the million pound-mark even faster.

Or you might have invested in slightly better performing investments and get more than 9.65%. Again, all ways to bring that million-pound figure even closer.

Of course there’s the opposite side of this coin too. You might not regularly contribute. You might get average annual performance of less than 5%. These are of course risks in growth asset investment like stocks and shares. And that pushes the million-pound figure out further.

That’s why it important to understand risk, know that regular long-term contributions are critical to the strategy and getting the right advice as to what to invest in, and how, is also important.

But these aren’t crazy numbers. They’re not wildly optimistic investment returns. The key aspect of the strategy is the long-term nature of it. It’s not rocket science, it’s simple, straightforward planning and investment.

Do it right, do it with the right guidance and you’ve got a real shot at becoming a millionaire. It’s just a matter of whether you want to put it into action, or not.

Regards,

Sam Volkering
Editor, Southbank Investment Research

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