Just as health is a symptom of eating well and regular exercise; wealth is a symptom of saving well and investing sensibly. Investment is not, therefore, the preserve of the wealthy. Rather, the means by which everyone can and should take control of their financial futures and in doing so become wealthy.
But how? Isn’t investing complex, expensive and fraught with danger? Don’t you need to have wealth in the first place?
It’s time to change perceptions.
Investing can be simple, easy and affordable to all. Here we provide an illustrative guide to becoming wealthy and demonstrate how the average person can achieve:
• A house deposit at 30;
• Retirement at 60;
• £24k (plus inflation) annual retirement budget;
• And a life changing inheritance for their children.
These projections are of course generic and purely illustrative. By contrast, your circumstances are unique and you should always speak to a financial adviser to develop a plan that is suitable for you.
In Your 20’s …
If you are lucky enough to be in your twenties, enjoy. But make no mistake, now is the time to start planning. Finances are tight, but £25 a week will change your life, as the following portfolio projection illustrates.
By the time you are 30 you are likely to have built up savings of around £25-35k. Not life changing, but enough for a deposit on your first house!
You will need to think about how much of your savings you want in a pension scheme as opposed to directly held. Pension contributions are generally tax deductible, so not only do your savings grow tax free, the taxman adds back the income tax on everything you put in.
Against this your pension is not accessible until you are at least 50. So if you’re saving for a house deposit or school fees, it may be wise to have a pension as well as a direct savings pot to get the best of both worlds.
This illustration assumes you save 7.5% of your gross income of £20k per annum, which works out at just £25 per week. However, if you are lucky enough to work for a company that contributes say 5% to a pension scheme for you, then you may only need to put aside £10 per week!
With your whole career ahead of you, short term market volatility is of little relevance and you can afford to target a higher rate of return; 7-8% would be fine. You should consider a well-diversified investment strategy on the riskier side of balanced. Importantly, make sure the fees are reasonable and check for big sales charges.
Increase your contributions in line with your salary – say 5% per annum. Work hard, get promoted!
In Your 30’s …
Maybe it’s time to settle down with your partner. If kids are on the cards money will still be tight, but your income is also rising steadily, assumed here to be £27k plus inflation.
Now is the time to increase your savings to around 10% of gross income. Hopefully, by now your employer is contributing 5% to your pension and making your net contributions around £25 per week, before inflation. Again you should continue to increase your contributions in line with your salary.
No changes to your objective or strategy are necessary and hopefully you have built up a nice little savings foundation. If you haven’t, you will need to increase your savings rate to catch up. If on plan, your portfolio projection would look like this:
Astonishingly, by the time you reach 40 your portfolio could have grown to circa £110,000-£180,000!
In Your 40’s …
Kids can dominate life in your 40’s, a magical time but costly.
This is also the time when careers flourish and incomes grow. The aim now is to save a about £95 a week (before inflation), but again hopefully your employer is contributing at least half of this directly into your pension and with the taxman’s help you may only need to put aside about £40 from your weekly earnings.
Still no change is needed to your investment strategy and if you are on plan your portfolio should now be growing rapidly.
If you remain on track, by the time you turn 50 you are likely to have savings of circa £360,000-£660,000. Congratulations, by anyone’s standards you are now wealthy.
In Your 50’s …
You now have many choices. Some of your pension savings may now become available to you, but for this illustration we will assume you continue with your plan.
It’s the height of your career. Your children are flying the nest and your income may have peaked (assume £50k, before inflation). Your employer might be contributing 10% by now. If you are on track, just 5% of additional contributions should be sufficient. If you have slipped behind on your savings plan to date, then now is the time to save hard.
With retirement approaching, it is now time to dial back the risk a little. Not too much at first, but steadily so that by retirement you are just on the cautious side of balanced; your savings still need to perform.
Over 40 years, your savings plan might look something like this and by the time you turn 60 your savings could be between £1mn-2mn. Amazing! You can look forward to a happy and prosperous retirement.
In Your 60’s …
Some people dread their retirement party, but if you are on track with your savings a world of opportunity awaits.
With no earned income, it is now time to start letting your savings take the strain and if you are on plan, a retirement income of £24,000 (adjusted for inflation) is entirely feasible. Your investment strategy should stay on the cautious side of balanced, aiming for 5-6% growth.
There is a high chance you will be able to maintain this level of outflow indefinitely and more than a 90% chance that your savings will last at least 20 years.
Saving and investing in this way will not only enable you to enjoy a prosperous retirement but may even provide security for your spouse and an inheritance for your heirs, transforming their prospects for generations to come.
Like so many things in life, the secret of wealth, is a simple discipline that anyone can master. The message is simple … to create tomorrow, start today.
Please note: You should always seek financial advice that is tailored to your specific circumstances. Capital international limited will work with your financial adviser to project your financial plan and enable you to implement it.
The projections set out in this article are intended for illustrative purposes only. We use statistical modelling to calculate estimated outcomes and chart portfolio projections, as well as to analyse the risk of loss for a portfolio. Our models are based on the historical performance characteristics of different asset classes and investment types together with our expectations for the future given the current economic and market environment. The expected performance characteristics of markets may change and markets may behave in ways that are impossible to predict. For the avoidance of doubt actual performance may be lower (or higher) than estimated.