My long-held ambition has been to retire to Spain. To do this, I need to generate a decent level of passive income and have sufficient capital to buy a property. That’s why I’ve been putting as much as I can into my Stocks and Shares ISA.
I believe investing in the stock market is the best way for me to realise my dream. With an ISA, it’s possible to invest £20k each year without having to pay income tax on dividends or capital gains tax on any profits.
It can therefore be a tax-efficient way to save.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Growth
According to IG, from 2012 to 2022, the FTSE 100 grew by an average annual rate of 6.3%. This assumes all dividends were reinvested. Otherwise, the return would be 2.4%.
The difference between these two figures illustrates the power of compounding, which has been described as the eighth wonder of the world.
But it’s important to be cautious. Savvy investors know that history is not necessarily a good predictor of the future. Of course, in the absence of a crystal ball, I only have the past to guide me.
Investing £20k every year, with annual growth of 6.3%, would turn into £1.77m within 30 years. Leave it another decade and I could have £3.55m. That would be more than enough for me to have an amazing retirement!
However, like most people, I haven’t been able to use the full ISA allowance each tax year.
An alternative strategy
Fortunately, property prices are 40% lower in Spain than in the UK. And it’s estimated that the cost of living is 25% less.
I therefore don’t need as much in my retirement pot if I move abroad.
Investing a single lump sum of £20k could turn into £125k within three decades. With this I could buy a property in Spain but I wouldn’t have much income to live on.
I could wait for my State Pension which, assuming a full record of national insurance contributions, is currently £203.85 a week for all those aged 66 or over. But I want to stop working long before then.
I reckon I need an income of around half the UK’s average annual earnings (£31,876) to have a decent life in Spain. I won’t have a mortgage or rent to pay so my money will stretch further.
This could be achieved by putting £2k a year into my ISA, along with an initial £20k.
Based on the FTSE 100’s past performance this could grow to £289,754 within 30 years. Using £100k to buy an apartment would leave me £189,754 to invest in shares paying generous dividends.
Income stocks
Each quarter, AJ Bell produces a forecast of the dividends payable by the UK’s 100 largest listed companies. There are presently four stocks — Vodafone, Glencore, M&G and Phoenix Group — expected to yield over 10% this year.
Of course dividends are never guaranteed and double-digit yields might be unsustainable. But I’m going to assume that an 8% return is achievable.
I could therefore earn £15,180 from dividends each year, after I’ve bought my Spanish property.
So, that’s the plan.
After the terrible weather we’ve had this summer, I’m even more determined to move abroad. All I need is for the FTSE 100 to deliver and I could one day be on my way.
