An extra £100k in ten years - what does it take?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

How much money - and how much time - does it really take to build a significant nest egg from investments?

This is the thing that many people want to know the answer to when they start their investing journey - but the answer isn’t always easy to come by. What’s needed is a simple blueprint for building a sizeable pot, with realistic levels of contributions and a time frame you can get your head around.

For example, how could you go from a standing start to £100,000 of invested savings in ten years? Targets like this are useful. Getting the full benefits from investing takes time and dedication - there are no overnight success stories, at least not ones that can be reliably repeated.

By drawing up a target like this and understanding the markers of progress you need to meet to reach it, you’ll be able to correct things along the way and will be encouraged to stay the course. In other words, you’ll be more likely to reach your target.

So - here’s how you could go from zero to £100,000 in ten years. Please note that what follows is purely illustrative and is based on an assumed return equivalent to the long-term return from investments. In reality, the performance of investments is uncertain and their value will go down for periods - not up in a smooth line as we assume here. What has happened in the past may not be repeated in the future.

• Open an ISA
• Add cash to your ISA

A journey of a thousand miles…

Achieving £100,000 in savings might be daunting but, like any big task, it’s more manageable in bitesize chunks.

Investing an amount each month via a regular savings plan means that you can build contributions into your everyday budget. It also means that you can ‘set and forget’ your investing because contributions are made automatically, so you’ll be less likely to mess around with your plan. That’s important because you need to give investments time, and to not be panicked into rash decisions when things don’t go to plan.

The question is - what monthly contribution would you need to make to your investments in order to achieve £100,000 ten years in the future?

We ran the numbers to find out. To do that we needed to assume a level of investment return, so we set ours at 5% net of all fees and charges. That’s fairly conservative compared to the long-run return from mainstream investments but is a sensible starting point.

You can see the results in the chart below.

To achieve £100,000 in ten years required monthly contributions to be set at £642. The lower line represents the total that has been contributed over the ten years, while the higher line shows the total fund size including any investment gain.

By the time ten years are up, the fund has grown in size to £100,107. There would have been £77,040 of contributions made in that time, with the remainder - some £23,067 - being generated from investment returns. That means almost a quarter of the total fund at the end has come from investment gains.

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Escalating your contributions

A tweak on this exercise is to steadily increase the size of monthly contributions each year instead of maintaining them at the same level. In doing so, it is possible to set monthly contributions at a lower level at the start and then raise them gradually.

This can be a useful way to approach long-term saving because it mirrors how our ability to make contributions changes over time. If you are working and earning a salary it is normal for your pay to rise as the years go by, meaning you should be able to contribute gradually more. In practice, this can mean tweaking your contributions higher each time you get a promotion or a pay rise at work.

Assuming the same investment return, we found it was possible to start monthly contributions at just £567 and then increase these by 3% a year - to reflect annual wage rises - and then achieve a total investment fund of £100,132 after ten years. In that time, contributions will have totalled £78,001 meaning £22,131 would have been generated from investment gains.

Where to do it?

Being tax efficient is an important part of investing success in the long term. In our scenarios, substantial sums have been generated through investment returns which could be subject to tax unless arranged correctly.

Thankfully there are simple ways to do it. ISAs - or Individual Savings Accounts - are designed with this purpose in mind.

• Read more about opening an ISA

For savings intended for retirement, pensions are another way.

• Read more about opening a Self-Invested Personal Pension

ISAs allow up to £20,000 to be contributed to savings or investment each year and any return made from those contributions - including any income they pay - will be free from tax.

Returns on investments held outside an ISA - such as an Investment Account - are potentially subject to Capital Gains Tax (CGT) - charged at 18% for basic rate taxpayers and 24% for higher-rate taxpayers. There is an annual allowance for gains of £3,000 before CGT applies.

In our example, where £23,067 of gains have been made over ten years, CGT totalling £5,536 (£23,067 x 0.24) could be due, assuming no allowance is available and the individual is a higher rate tax payer. Investing inside an ISA means you can avoid this.

• Read more about being tax-efficient