It’s good to set goals, especially when trying to achieve something remarkable. Like building a six-figure passive income for retirement. Amazing things can be done by drawing up a plan and sticking to it.
I didn’t start investing seriously in stocks and shares until my early 30s, but wish I’d begun a full decade earlier. That’s because time is the biggest friend an investor can have. Especially when investing primarily in FTSE 100 dividend shares, as I do.
In the short term, stock markets are volatile. There are years when my portfolio has fallen in value rather than risen. Yet, over time, history shows that equities beat every other asset class, with the FTSE 100 delivering an average long-term return of 7% a year.
I’m thinking long-term
I love buying FTSE 100 dividend stocks when they’re trading at low valuations and offering ultra-high yields. This is where my long-term buy-and-hold strategy comes into its own. By reinvesting my dividends, year after year, I can buy more and more shares, which pay me more dividends, in an endless virtuous cycle.
I even benefit in years when share prices fall, as my reinvested dividends pick up more stock at the lower price. If I’d been wise (or rich) enough to start investing, say, £500 a month at age 25, I’d be smashing it today, as my crude calculations show. Especially if I had the foresight to increase my contribution by 5% every year.
If I did that and my chosen stocks matched that average FTSE 100 return of 7%, by age 68, I’d have made cumulative contributions of £857,960.
Compound interest would have added a thumping £2.41m to that. Combined, they would give me a total retirement pot of a staggering £3.27m. If my portfolio yielded at 5% of the time and I took all my dividends as income, I’d earn £163,625 a year without lifting a finger.
My capital should keep growing
If I picked my stocks carefully and generated an average annual return of 10% a year (as I hope to do in reality), I’d have £6.88m at the end of my 43-year investment timeframe. With a yield of 5%, that would give me income of £343,797 a year – almost £350,000. And that’s just the income. I’d still have my capital, which should continue to grow as markets rise.
These are crazy figures. They posit a perfect world, where I start investing early, increase my contributions consistently, and never, ever raid my savings. Also, there’s no guarantee I will hit my investment targets. I may fall short if my stock picks underperform or equities do worse in the future than in the past. Dividends are never guaranteed.
Yet my rough maths highlights an important truth about investing. It is possible to build huge sums, from relatively small regular investments. The key is to start young and stick with it. While early birds do best, even starting at age 35, 45 or 55 is far better than never starting at all. My portfolio won’t stop growing when I turn 68, but with luck should keep rising for as long as I live. As will my passive income.
