How investing £3 a day could generate passive income of £780 a month

By investing regular monthly sums in FTSE 100 dividend shares I expect to generate a comfortable passive income to fund my final years.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s how I’d target £496k in FTSE 100 shares and £19k of passive income in a Stocks & Shares ISA

I invest as much surplus cash as I can at the end of the month in my Stocks and Shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »