How to become an ISA millionaire

This is the third in my annual posts about my ISA (tax-free) portfolio.  I’ve written before about how there is an outside (~10%) chance of my ISA portfolio reaching $100m, if I live for another 40+ years.  Yet, as of my last post a year ago, the total FvL ISA pot was worth ‘only’ £355k (~$500k, back then!).  So how am I feeling about multiplying my ISA 200x?

My $100m assessment was based on a scenario analysis over the next 40+ years.  Making various assumptions (no withdrawals, regulation changes, etc), if I maintain contributions at £20k x2 per year, and achieve an ‘Above Average Risk’ level of return (>9% per year average, quite a high level of volatility), then in about 10% of predicted outcomes my total pot would reach $100m.

There are a couple of simple mental tricks that help me get my head around this growth. First of all, contributing £20k x 2 per year is quite a lot of money; over 30 years this is £1.2m.  To make it easier to think about the growth of this annually-topped-up portfolio, let’s simplistically assume it isn’t annual top ups, but instead is a lump sum of £600k ($750k) in year 14.

Secondly, remember the rule of 70.  Assuming I average returns of 7% then my portfolio doubles in 70/7=10 years.  At an average return of 10% it takes about 7 years to double.  So if I start with $0.5m, and averaged 10% return, after 35 years I have doubled 5 times, and I’m at $16m.  But if I add (see previous paragraph) $750k in year 14, this $750k then doubles three times; this adds a further $6m.   The two together get me to $22m in 35 years. Now assume I last a further 14 years , which takes me to the average life expectancy for UK males of my age, and I double my combined $22m pot 2 more times.  $88m.  Not quite $100m, but not far off.

Before you say that 10% per year is unrealistic, I am citing everything here in nominal ‘money of the day’ figures.  This is before allowing for inflation.  Historic returns for a diversified portfolio can easily achieve 5% per year on top of inflation.  This works out as 7-8% per year in nominal figures. 10% is high, I will accept, but not absurdly so. If you have significant fees then you can forget it, but if you hold low-cost passive trackers this is not that unusual.

In the meantime, there I was a year ago with £355k.  At today’s exchange rate this is barely $450k.  How have I fared since then?

The first thing to note is that the annual allowance has increased about 33% from ~£15k per person to £20k per person.  I have maxed this out, thus topping up my ISA by £40k (between me and Mrs FvL).  If nothing else had happened, this would have increased my portfolio to £395k.

In fact after the tumultuous last 12 months my ISA portfolio has returned over 15% in pound terms, even before my top up.  This is a less than my overall portfolio return, as my ISA is a) unleveraged, b) UK centric c) fixed income orientated, not equity orientated c) underweight on some key holdings that have done well for me (e.g. Amazon).  But 15% is still well above 9-10% cited in my discussion above. The net result is that my ISA portfolio(s) now amount to £455k.  A round £100k increase on the previous year. Delicious.

Starting today with £455k, and using the same Flexible Retirement Planner that I used last year with the same assumptions, the ‘middle scenario’ sees my pot reaching £35m before I expire.  This is about 15% better than last year. Of course with the weaker post-Brexit pound the $USD hasn’t really risen (last year $43m, this year $44m).  But there is a 10% chance my portfolio will exceed £100m ($125m even in these benighted times).  My fingers remain crossed!

The point of this post is not necessarily to suggest we can all become ISA $100millionaires. That depends on starting with >£400k, having 40+ years left, being able to contribute £40k per year indefinitely, withdrawing nothing, and achieving decent equity returns on average; this is going to be a rare cocktail.

What I’m really getting at is that if I have a plausible shot of reaching $100m in my lifetime, a lot of people will have a realistic chance of becoming ISA $millionaires, if they put their mind to it.

Becoming an ISA $millionaire, or even a £millionaire, is more achievable than you might think.  For instance, it is achievable under the following assumptions:

• You are 44 or younger today.
• You live until you are at least 70.
• You (and your better half) have an ISA pot of £50k as of today. For every ten years younger you are than me, you can halve this starting point – so a 24 year old would need to start with about £12k in their pot.
• You invest £10k per year into your ISA(s) every year. Again, for every ten years earlier you start, you can halve this; the 24 year old with £12k in the pot needs only to top up by £2500 per year.
• You never withdraw anything from your ISA(s).
• Your ISA(s) achieve average returns of 7%, before inflation. This is very much in line with historical UK averages, provided you keep fees low

What about a 24 year old today, with nothing in the pot yet, and a tight monthly budget?  Well, if they start saving £100 per month into their stocks/shares ISA today, persuade their other half to do the same, stick with the other half (what are the chances?!) until they die aged 90, then the graph below shows that happens.  They’ll retire with ISAs of £790k – almost exactly $1m.  And if they can avoid touching the pot during retirement, they’ll more than triple their ISA to £2.7m before their heirs fight over it.