Could I turn four figures of savings into a five-figure second income? In other words, could I start with £9,999 or less and create an annual income of roughly the same amount (or perhaps more)?
It sounds like a tough task. My savings would require serious growth before I could withdraw that much cash. Accumulation on this scale would need the right investing strategy, especially with the following two conditions.
My goals
First, I’m not looking to give myself an extra job here. I don’t want to spend hours a day staring at my laptop, nor do I want the stress and headaches that come with being a landlord. No, this second income needs to be truly passive.
Second, I want my income to last. I don’t see any point in making my money work for me if I can’t rely on the income indefinitely. So, I’ll stick to a ‘safe withdrawal rate’ of just 4%. Such a low withdrawal increases my chances of relying on my income in perpetuity.
This strategy will require above-market returns. In other words, I’d be looking to invest in individual stocks I believe can return more than the market average.
Picking the cream of the crop from the FTSE 100, FTSE 250 and S&P 500 won’t be simple, but these indexes are filled with quality companies. There are plenty of great stocks for me to choose from.
Long periods
At the same time, aiming for market-beating returns does carry risk. Careful research and stock selection might mitigate risk but it won’t eliminate it.
This is why I won’t get reckless here. I won’t grow my money through unproven penny stocks or high-risk, high-reward option contracts, looking for big gains but exposing myself to potentially big losses. I’ll still target companies to hold for long periods.
In fact, I’ll only be aiming for one or two percent above average. This might sound small. I mean, what’s an increase from 10% to 11% going to do? Well, the answer is really quite a lot.
Warren Buffett understands the potential difference. He’s spoken about how even 1% “makes an enormous difference in how much money you’re going to have in retirement.”
Let’s run through a few possibilities then. The key factors here are the time spent accumulating before withdrawing and the return rate.
| 9% | 4% withdrawal | 10% | 4% withdrawal | 11% | 4% withdrawal | 12% | 4% withdrawal | |
| 1 year | £10,899 | £436 | £10,999 | £440 | £11,099 | £444 | £11,199 | £448 |
| 5 years | £15,385 | £615 | £16,103 | £644 | £16,848 | £674 | £17,622 | £705 |
| 10 years | £23,671 | £947 | £25,935 | £1,037 | £28,391 | £1,136 | £31,055 | £1,242 |
| 20 years | £56,039 | £2,242 | £67,268 | £2,691 | £80,615 | £3,225 | £96,453 | £3,858 |
| 30 years | £132,664 | £5,307 | £174,477 | £6,979 | £228,900 | £9,156 | £299,569 | £11,983 |
| 40 years | £314,062 | £12,562 | £452,547 | £18,102 | £649,944 | £25,998 | £930,417 | £37,217 |
So, given enough time, each return reaches a five-figure income from four figures of savings. Looks impressive in a table, but the reality is murkier than a nine-column table might suggest.
Final thoughts
It’s not simple to beat the market over long periods. A 12% return over 40 years leads to astronomical amounts, but most investors won’t achieve this.
At the same time, a way to get around this is to add to the cash. With £9,999 as a starting point, I can drip-feed smaller amounts each month. By depositing extra cash, I can hit incredible incomes even if I don’t get the best-case scenario in terms of rate of return.
Even better, drip-feeding takes advantage of any down periods. When the markets fall, I can snap up shares on the cheap. This can lead to outsized returns compared to putting a lump sum in all at once.
