Despite having worked since 1987, I don’t want to retire just yet. However, when I decide enough is enough, my keyboard will fall silent. But until I have enough passive income to retire comfortably, I’ll keep doing this job I love.
Five forms of passive income
Passive income is generated outside of paid work and ranges from the ultra-safe to the very risky.
For example, savers can earn almost risk-free savings interest from cash deposits. By taking more risk, investors can collect coupons (interest) from government and corporate bonds.
A third option comes from buy-to-let: renting out property to tenants for a monthly income. I must confess, having seen the wreckage some tenants cause, this is definitely not for me.
Next comes regular income from the state and former employers in the form of pensions. Finally, my fifth and favourite type of passive income comes from share dividends.
The downsides of share dividends
Share dividends are regular cash distributions paid by companies to shareholders as a reward for owning businesses. But dividends are one of the riskiest kinds of passive income.
First, future dividends are not guaranteed, so they can be cut or cancelled without notice. Indeed, during the 2020/21 pandemic crisis, dozens of UK-listed companies axed or reduced their cash payouts.
Second, not all listed (public) companies pay dividends. In fact, most of the 1,926 companies listed on the London stock market don’t pay out cash to shareholders. But most FTSE 100 shares do.
Third, dividends are often taxed, so the taxman demands his cut each year.
Making £50k in passive income
To answer my title’s question, how much capital would generate a round £50,000 a year in passive income? Of course, it all depends on the future returns this sum would produce.
This table shows how big a pot I’d need to produce £50k a year in investment/passive income:
| Yearly return | Pot size needed |
| 1% | £5,000,000 |
| 2% | £2,500,000 |
| 3% | £1,666,667 |
| 4% | £1,250,000 |
| 5% | £1,000,000 |
| 6% | £833,333 |
| 7% | £714,286 |
| 8% | £625,000 |
| 9% | £555,556 |
| 10% | £500,000 |
If I make a lowly return of 1% a year, then I’d need £5m to generate £50,000 a year in income without touching my capital. Doubling this return to 2% takes my pot down to £2.5m.
As my yearly returns rise, my pot size declines dramatically. At 10% a year, I’d need only £500k to produce an extra £50k each year in passive income.
4% is fine by me
Now for some bad news. I can’t imagine that my family portfolio could reliably generate double-digit returns year after year. It might well do, but I won’t bank on it.
In order not to erode my capital — and to offset inflation (rising consumer prices) — I’d aim for a modest return of 4% a year. At this level, I would need £1.25m to produce £50k a year of income.
As older investors (I’m 55 and my wife is nearly there), we already have a large sum invested in shares. Hence, a passive income of £50k is a previous goal. Our current goal is to have dividend income of over £100,000 a year, while still leaving a comfortable amount behind for our two adult children.
Finally, here’s a great quote from Sir Winston Churchill: “Saving is a fine thing. Especially if your parents have done it for you!”
