How big does an ISA need to be for someone to quit work and retire early?

Ben McPoland explores how long it might realistically take to reach financial freedom investing regularly in a Stocks and Shares ISA.

Posted by Ben McPoland

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

Most people invest inside a Stocks and Shares ISA to help them live a more comfortable life later on. Some might even reach a point where their portfolio supports early retirement.

But how realistic is this ? And how long might it take? Let’s take a closer look.

Aiming for £1.5m

The obvious thing to note is that what one person would need in retirement is totally different to someone else. So is the affordable amount to invest every month.

For example, industry data show that most people fail to max out their £20k annual ISA allowance. When we consider that the median full-time annual salary in the UK was about £37,000 last year, this makes sense. 

As such, what sum and time is needed is highly variable. But for simplicity’s sake, I’m going to assume a figure of £1.5m would be enough.

Wealth-building takes time

Now, reaching that amount might sound like a fairy tale when starting from scratch. But the following table shows how quickly this sum could be reached investing £600 every month. I’ve included three rates of annual return (8%, 10%, and 12%).

8% return*	10% return	12% return
37 years	32 years	28.5 years

*Figures do not include platform charges, and assume all dividends are reinvested.

Taking the middle 10% return scenario, this shows that it would take 32 years to reach £1.5m. So a 30-year-old could quit work and retire at 62 rather than 68 (or whatever the State Pension age is by then).

Were this investor to achieve a higher 12% average return, this would shave nearly four years off.

Some top investors have generated returns far in excess of 12%, including Warren Buffett (an incredible compounded annual return of about 20%). A person generating such a return would reach this target inside 21 years.

However, this type of return is very rare (after all, there’s a reason Buffett is a celebrated billionaire!). Indeed, 12% might even be stretching it, as the long-term global market average is more like 9%-10%.

To show what’s possible, here are two tables showing how quickly £1.5m could be reached investing £1,000 and £1,666 per month (the latter being the maximum allowance).

£1,000 per month	8% return	10% return	12% return
	31 years	27 years	24 years

£1,666 per month	8% return	10% return	12% return
	25 years	22 years	20 years

If you are starting out with a dividend re-investment plan, the good news is that compound interest takes a while to make a noticeable difference, better if you can add fuel to the fire with a yearly contribution.