How I’d invest £100 a month to aim for a passive income for £48,605 a year for life

It’s possible to generate a five-figure passive income by investing as little as £100 a month. The key is to start buying shares as early as possible.

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.

Smart young brown businesswoman working from home on a laptop

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.

When I’ve had enough of actively working for a living, I plan to live on the passive income generated by my investments. Yet building a big enough portfolio to fund a comfortable retirement won’t happen overnight.

Unless someone is lucky enough to have a juicy lump sum to begin with, or a kingsize income (neither of which applies to me), the wealth has to build slowly and steadily. I’ve been investing for more than 25 years, so I’m already some way there. But with another 15 years to go before retirement, I’m still going flat out.

I invest in two ways. First, by making regular monthly contributions. Second, by pumping in lump sums whenever I have cash to spare.

Long-term thinking

I started by investing in a few low-cost exchange traded funds (ETFs) to give me a broad spread of shares across the FTSE 100, the S&P 500, and emerging markets. Now I’m trying to turbo-charge my portfolio by investing in individual UK shares.

Thanks to recent volatility, now looks a great time to buy dirt-cheap, high-yielding FTSE 100 stocks like Aviva, Lloyds Banking Group, Glencore, and Taylor Wimpey. I buy whenever the market dips and reinvest all my dividends for growth.

Now let’s say I was starting from scratch at age 30. At that age, even a relatively small sum such as £100 a month has time to roll up into something much bigger.

Let’s assume I increased my contribution by 10% a year and my portfolio matches the FTSE 100’s average long-term total return of 8% a year. By age 68 I’d have built up an investment portfolio worth a staggering £1,216,884.

I’d have made total contributions of £436,852 and generated £780,031 in compounding dividend income and share price growth.

There’s a long-standing financial planning model known as the 4% rule, which states that if an investor draws that percentage of their savings each year their pot will never run empty.

I’ll leave some capital, too

If I followed that, my pot would generate £48,605 a year in retirement income. Unfortunately, that won’t be worth as much in real terms as it is today, thanks to inflation. But it should still generate a pretty decent return. If I need more, I can dip into my capital, although I’d rather leave that for my family.

Investing is a long-term game, and the earlier I get going, the better. If I didn’t start putting away £100 a month until age 40, I would only have £375,444 by age 68. That’s despite hiking my contributions by 10% a year and generating the same 8%-a-year total return as before. It’s amazing how much damage a lost decade can inflict.

Under the 4% rule, I’d only generate income of £15,018 a year. Although, that’s better than if I’d done nothing.

There are no guarantees with investing. I might generate less than 8% a year, I might generate more. There’s also the risk that the market crashes just before I retire. Although if it does, I would simply leave my money invested and wait for equities to recover, as they always do in the end. That way my portfolio will continue to generate capital growth in retirement, as well as all that passive income.

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 has positions in Glencore Plc, Lloyds Banking Group Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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

Investing Articles

Bargain buy? The Unilever share price just hit a 52-week low!

Earlier today, the Unilever share price dropped to a one-year low. The shares are now bouncing back but nowhere near…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

The Dr. Martens share price just crashed 25%! Time to buy?

The Dr. Martens share price has plummeted. Is this an opportunity for our writer to add the stock to his…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

Dr. Martens: is this collapsing FTSE 250 stock now a contrarian buy?

Shares of this well-known FTSE 250 firm just dropped to a record low following a poorly received report. Is this…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Why I’d start putting money into dirt cheap UK shares this December

Our writer isn't waiting until the New Year to consider opportunities for his share portfolio. Here are some reasons why…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

What are the best shares to buy in December for 2024?

Christopher Ruane explains why he's not waiting until 2024 to make moves in the stock market and would be happy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

£5k of savings? I’d target income of £7,544 a year by investing in just 3 dividend shares

I'm building a portfolio of dividend shares to give me a passive income in retirement. It's astonishing how the rewards…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

One dividend giant I’d buy over Aviva shares

Aviva shares still look a good buy to me, but I think right now another high-yielding dividend stock looks even…

Read more »

Newspaper and direction sign with investment options
Investing Articles

I would grab these cheap shares before prices rise again

With the UK market in a slump, this Fool UK contributor is looking at buying up some cheap shares before…

Read more »