cost of autosketch 9 software Charlie asks: “Hello I’m currently 16 and wish to retire by age 40 with a pot between 1-2 Million pound. Apart from maxing out my S&S Isa on a low cost index fund and possibly through bonds, how shall I invest?”
Q&A 76 – Investing As A Teenager – Shownotes
Hello I’m currently 16 and wish to retire by age 40 with a pot between 1-2 Million pound. Therefore I was wondering my best investment options to achieve this and I would like to withdraw 3% to live on through dividends and capital gains.
Apart from maxing out my S&S Isa on a low cost index fund and possibly through bonds, how shall I invest?
Thinking The Right Thoughts…
Thank you so much for your question. First of all, awesome job. I wish (and I bet that about 99.9% of other listeners also wished) that they had started thinking about their financial journey at a younger age. Therefore, for you to be asking such questions at the age of 16 is very impressive.
I’m also a big fan of you having a goal established (retire aged 40 with a pot between 1-2 million pound) and understanding that you want to withdraw 3% per annum + dividends to live on after the age of 40.
Before we look into techniques for getting you there, let’s run some numbers to see what this actually means.
How Much Would You Need To Save?
The first thing I want to know is how much you need to put aside each year in order to achieve your goals. This will use a few assumptions, but the maths is fairly easy.
Let’s assume that you have nothing invested for your goal today. Conservatively, we’ll say that you can earn on average 5% above inflation on your money over the 24 year time period between today and when you turn 40.
If you wanted a pot of £1m in today’s money when you are 40 based on those assumptions, you’d have to save £22,470.90 per year.
If you wanted a pot of £2m in today’s money when you are 40 based on those assumptions, you’d have to save £44,941.80 per year.
Now, my first reaction to those figures are that they seem very high. How many 16 year olds can save £22k a year?!
How Long Would That Last You?
However, the next part of the equation might make you feel a little better. If you had a pot of £1m when you were 40, which you continued to grow at 5% above inflation each year, and you withdrew the 3% per annum + dividends of say 4% per year, you’ll effectively be taking out 7% and earning 5%.
At those levels, when you are 40, you would take a retirement income (the 7%) of £70k, of which the first 25% would be tax free and the remainder taxed as income/capital gains.
If you carried on in that vein, even at the age of 90, you would still have a pot (all in today’s money) of £300k and therefore an income of £21k.
So, let’s say that £1m is enough of a target for you at the age of 40, saving £22,471 per year over that time period seems very ambitious. So, what are the ways that we can address this?
What Are The Other Variables?
The first is our rate of return on our investments. In our workings, we have based the figures on earning 5% above inflation on our investments. Long-term averages show that investments in the world’s leading market indices have returned more than that in the long run.
If we adjust our return to 7% above inflation, our annual invested amount falls to £17,189 per annum, which is a little more manageable.
Then, we need to think about other investments. We have based the investments above on stock market returns. However, as you develop your investment portfolio, you may find that you can achieve better returns elsewhere from investments in property or small business for example.
The other variable is time. Yes, for a 16 year old, investing around £20k a year is a crazy proposition. However, depending on the career path you take, that may only be a savings rate of anywhere between 10%-50% for salary earners of £40k-£200k. Whilst your salary clearly won’t be in this range as a 16 year old, it could very reasonably be so as a 40 year old.
Whilst this may seem a little ambitious again, it’s good to be ambitious. Just with SMART goals, whilst the A is ambitious, the R is realistic. And with the average savings rate in the Moneystepper Savings Challenge being just under 50%, I would argue that this is a realistic goal.
So, I would conclude that your plan is pleasingly ambitious!
coreldraw x7 for mac price Where Should You Start Investing?
Now, onto the second part of your question. You ask: “Apart from maxing out my S&S Isa on a low cost index fund & possibly bonds how shall I invest, thank you!”
The first suggestion from you there (maxing out your S&S ISA on a low cost index fund) is the basis for Moneystepper’s suggestion of passive investing and on which we have based the assumptions in the first part of your questions.
The problem you will have is that, in the UK, you have to be 18 years old to open an S&S ISAs. Your best alternative for the next two years may be high interest (3-5% current or savings accounts) instead.
Looking beyond this, you mention bonds. However, bonds are generally lower risk, lower return assets and hence you wouldn’t see any benefit in holding bonds in your investment portfolio over this length of time.
Instead, in the long-run, you want to be looking for higher reward investments (that return more than 6-7% more than inflation each year). Commonly, as I said above, these are investment in residential or commercial property, or investment in small business.
However, with these higher reward investments come greater risk and hence they are things to be considered carefully over time.
So, Charlie, in conclusion, good work on having a goal and financial dream. You are already asking the right questions. For the next couple of years, the most important things will be learning about personal finance and investing, and starting to get as much put away into long term savings as you can.
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