How I’d use my ISA to target a £5k annual second income

How easy, or hard, is it to build a good second income for our retirement? I do some sums to find just out what might be in reach.

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We’re into a new ISA year, and that means we have a whole new allowance to put towards building a second income.

The UK state pension is worth less and less as time goes on. And that means we need to do as much as we can to help pay for our lives when we take off our work boots for the last time.

People seek a passive income in many ways. But for me, it has to be shares in UK companies. Over the past hundred years and more, UK shares have beaten all other investments that I could really go for.

ISA savings

Now, I don’t have £20,000 to put into my Stocks and Shares ISA each year. But I want to use as much as I can, to earn that extra cash for when I retire. So let’s go with an annual income that I think could make a nice difference to me.

I’d say £5,000 per year is a fair sum to start with. And then maybe I’ll see what else I might manage. An extra five grand a year could pay for some very nice holidays.

So, how do I plan to get there? First, I need to think how much I might hope to earn from UK shares.

Dividend stocks

I mostly buy dividend stocks, and I’ll stick with those. So what could I earn? Well, I tend to go for 6% per year when I do sums like this. Some FTSE 100 stocks pay more than that, while some pay very little.

But if I aim for good dividends that are well covered by earnings, I think that’s a good goal. And I see a lot of stocks out there with yields like that and more.

This is just a “What if?” thing, though, to help me get some idea of what I might manage. And I’m not making any actual predictions here.

Build a pot

So, working on a 6% income, to earn £5,000 per year I’d need a bit over £83,000. That’s not so much that it scares me into giving up, not by a long way. But how might I get there?

Let’s say I have 15 years before I want to stop work. And I’ll work on the same goal of 6% per year from dividends.

In the 15 years I have, I’d need to put away £300 per month. My £5,000 per year is £417 per month. So I could invest less per month now, while I’m working, and earn more after I stop. I like that.

Saving more

If I can lift it to £500 per month, I could have £144,000 in 15 years. And then that could pay me £8,640 per year as a second income.

This is all at today’s prices, and doesn’t look at any share price rises. And over the long term, UK shares have gained almost 5% per year above inflation, on average.

Now, I really don’t think they’ll beat this year’s inflation. But for the long term, that looks good to me.

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