I plan to fund my retirement by generating passive income from London Stock Exchange shares, on top of my State Pension. The more I invest today, the more income my portfolio should generate when I finally stop working.
I invest regular monthly sums in top UK dividend stocks, mostly plucked from the FTSE 100. As I’m still working, I reinvest all the payouts I receive straight back into my portfolio. That way I pick up more stock, and earn still more dividends.
The big question I’m facing now is how much I need to invest each month to generate enough income to enjoy my final years. In some respects, the answer is easy: as much as I can afford.
I’m building a passive income from shares
That’s what I try to do, but I’d also like to have a clearer idea of how my money will grow. Let’s say I invested the equivalent of £3 a day, or £1,095 a year.
Now let’s assume my portfolio grew in line with the long-term total return on the FTSE 100 over time, which is around 7% a year, with dividends reinvested.
How much I have at retirement will depend on my investment timeframe. So if I was 40 years from retirement, I would build up a pot of £233,902.
My next assumption is that I draw 4% of my portfolio each year as income. This is known as the ‘safe withdrawal rate’, which suggests that if I draw that percentage of my investments each year as income, my pot will never run dry.
This would generate income of £9,356 a year, which works out at £780 a month, or £26 a day. I reckon that’s a pretty good return from just £3 a day.
Investing small, regular sums to generate a passive income in later life is easiest when young. But I’ve got a confession. I’m actually just 15 years from retirement. Investing £3 a day wouldn’t be enough for me to build anywhere near £780 monthly passive income.
FTSE stocks need time to grow
Unless I raise my game, my portfolio would be worth just £29,442 by the time I retire, if I stick to investing £3 a month. Drawing 4% of that as income each year would give me just annual income of £1,178 or £98 a month, which is nowhere near enough. Luckily for me, I started investing in shares in my early 30s (although I wish I’d started earlier).
If I was investing from a standing start at my age, I’d have to go flat out, and invest much, much larger sums. If I invested £30 a day (that’s £930 a month), I would have £294,424 by 2037, assuming the same total average annual return of 7% (which I know, of course, isn’t guaranteed).
That would pay off, though. It would give me income of £11,778 a year or £981 a month. Finding that much spare money each money isn’t easy, though, and the moral of the story is clear. The best way to build a decent passive income from investing is to start as early as possible, and stick with it.
The post How investing £3 a day could generate passive income of £780 a month appeared first on The Motley Fool UK.
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Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.