Are you 40 years old? Here’s how skipping the daily coffee can build a £2.4m ISA!

If you’re over 40, you might – like me – always think you’re on track to reach your retirement goals with your ISA. Your plans may include a comfortable retirement with regular vacations and gifts to loved ones. They can also include hanging up your work apron early.

It is true that many people worry about how they will pay for their retirement. Research from Charles Stanley shows that 28% of Brits are not on track to achieve their ‘dream retirement.’ Another 39% said they didn’t know how much they would need to retire comfortably.

They may not want to hear it. But for these people, acting quickly is more important than ever as the cost of living and welfare rises, and uncertainty over future State Pension rules continues.

The good news is that catching hives doesn’t have to be painful. Even a 40-year-old can, by investing the price of a coffee every day, build up a multi-billion dollar ISA by the time he reaches 65.

Here is the way.

Construction fee

I’m sure you’ve seen the prices at your local coffee shop slowly creeping up. Today, my hometown Starbucks you won’t charge me a penny less than £5.40 for a large caffè latte.

With coffee prices at their highest in 50 years, the cost of my daily maintenance looks like it will keep rising as well. This is enough to give me the hump. And especially when I’m looking for the best way to use my money to invest in stocks, funds, or trusts of course.

Let’s say I save that £5.40 and make my morning coffee at home instead. At the end of each quarter I will have around £493 to invest in my Stocks and Dividends ISA.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Windfalls are beautiful

Past performance is no guarantee of future returns. But history shows us that even a small amount like this is not enough to build significant long-term wealth.

I FTSE 100 has delivered an average annual return of 6.1% since 2014. S&P 500 stocks, on the other hand, gave an even better 12.4%.

If someone invested £493 in a Footsie tracker fund each quarter, they could – after 25 years – create an ISA worth £115,065 (excluding fees). With the S&P 500 fund, they would have made £328,142.

Both are decent windfalls, in my opinion, for the cost of a daily coffee skip. But thanks to a wide range of stocks and funds, investors can do even better.

£2.4m ISA

For example, suppose an investor parks his money iShares S&P 500 Information Technology Sector ETF (LSE:IUIT). Since its inception in 2015, this exchange-traded fund (ETF) has delivered an impressive annualized return of 22.9%.

If this rate were to continue, a 40-year-old who invested £493 every quarter would have a portfolio worth a lot of money. £2,444,676 (without fees) when they reach 65.

I actually own this fund in my portfolio. By spreading my money across 69 stocks (like Nvidia, Tesla, again Amazon), I can target high returns while controlling risk.

The gains I make can be disappointing during a recession when tech revenue falls. But in the long run, I’m optimistic that the fund can continue to deliver significant gains thanks to growth areas such as artificial intelligence (AI), robotics, and quantum computing.