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Unlike a savings account, there’s no a guaranteed return from a Stocks and Shares ISA.
Yet recent history provides a useful guide to what can be achieved with one. According to Moneyfacts, the average investing ISA’s provided a typical annual return of 9.64% since 2015.
This kind of brilliant return would have turned even a modest regular investment into a tasty pile of cash. Indeed, if someone had put £100 into a Stocks and Shares ISA every month over that period they’d have doubled their money (to £20,067).
Want to know how much they could have made by retirement? That’s trickier, but it’s possible to make a rough calculation. Let me show you why.
Here’s your answer
Albert Einstein once called compound interest “the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.“
Cool story, I hear you say. What does this have to do with our wealth-creating exercise?
Put simply, time is an investor’s best friend. The longer they have their money in the stock market, the more each pound multiplies into something far bigger.
When figuring out how much £100 a month could become by retirement, then, we need to consider how long that investment is made over.
Let’s say we have a 40-year old just starting their investing journey. Here’s how much they’d have in their ISA by the time they reached 55, 60, 65 and 70, based on the long-term average return:
Retirement ageCash return55£40,10360£72,48565£124,82170£209,405
Building retirement income
Those are pretty decent returns for just £100 a month, I think. If our investor decided to start drawing down 4% of their portfolio each year at age 70, they’d have a second income of £8,376 on top of the State Pension.
If you’re like me, though, you’ll also look at this and be thinking: could I live off this amount in retirement?
I’m not sure I personally could. This is why being able to increase deposits over time is another essential part of the ISA-building process.
Someone who raised their annual contributions by 5% a year would have £333,540 after 30 years, and a £13,342 non-State Pension income. A 7% rise would give them a £441,294 nest egg, and a £17,651 additional income.
Targeting ISA wealth
None of this is guaranteed, of course. But with a wealth of shares, trusts and funds to choose from, returns like this remain very achievable, in my view.
I personally like the idea of investing in exchange-traded funds (ETFs) like the Xtrackers World Momentum ETF (LSE:XDEM). Indeed, this is a fund I hold in my own portfolio.
By investing in hundreds of global companies (350 in total), it protects returns from turbulence among particular stocks, sectors and regions. This reduces risk and can provide a smooth return over time.
A focus on equities leaves the fund vulnerable to stock market downturns. But then it also allows investors to profit from potential recoveries, generating enormous wealth over the long term.
The Xtracker World Momentum’s 13.6% average return since 2015 illustrates this principle in action. Funds like this can provide a simple and effective way to build a Stocks and Shares ISA for retirement wealth.