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.