£20,000 in savings? Here’s how I’d aim for £14,710 a year in passive income

With spare savings, this Fool would start generating passive income for a more comfortable retirement. Here he details how he’d go about it.

| More on:
Shot of a senior man drinking coffee and looking thoughtfully out of a window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Sitting on a lump sum of cash and not knowing how to invest it can be an issue. I reckon the best thing to do is start generating passive income.

This way, it means I’m putting my money to work. My plan is to invest in stocks that provide a substantial and stable yield. Further down the line, I can use these funds to enhance my lifestyle or have a more comfortable retirement.

If I had £20,000 in savings, here’s what I’d do today.

Maximising my returns

£20,000 is a healthy sum of money. It’s also the maximum annual contribution for a Stocks and Shares ISA. Every investor in the UK is entitled to this limit. If I decided I wanted to pull my money, I’d be able to do so tax-free.

On top of my £20,000, I’d also look to add monthly contributions. I see this as a smart way to maximise my potential earnings.

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.

How much could I make?

So, how much passive income could I make? Let’s assume a yearly return of 8%. That’s around the annual percentage the FTSE 100 has returned since its inception in 1984.

Of course, goals vary from person to person depending on a number of factors. One of the most important is investment timeframe.

My target is 30 years, so let’s use that. After that time, my initial £20,000 could be worth £218,714.

What’s more, if I were to invest an additional £100 a month, my nest egg could be worth over £367,750!

If I then retired at that point and applied the ‘4% drawdown’ rule, that would leave me with £14,710 in passive income a year.

What to target

But what stocks would help me get there? Well, I’d look to buy companies like Legal & General (LSE: LGEN).

Currently, its shares yield a healthy 8.1%. That’s not the highest on the Footsie, but it’s certainly up there.

Dividends are never guaranteed. And a high yield can sometimes be unsustainable. However, I’m confident the business will continue returning value to shareholders in the years to come.

It has shown this with its latest cumulative dividend plan, which is on track to return up to nearly £6bn to shareholders by the end of this year. More widely, its dividend payment has grown 72% in the last decade.

It operates in a volatile industry. Given the macroeconomic pressures of the last few years, the business has suffered. Its operating profit fell by £17m in the first half of 2023 compared to the year prior. Its assets under management have also taken a hit in recent times.

But for a long-term buy, I think Legal & General could be a winner. The iconic brand is a leader in the pensions industry, including the UK Pension Risk Transfer Market. This puts it in good stead to capitalise on trends such as the UK’s ageing population. It also looks cheap, trading on just 6.9 times earnings.

Diversification is imperative for a successful portfolio. So, I wouldn’t invest all my money into a single company. That said, Legal & General would be one of the shares I’d look to help me achieve my goals.

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.

Charlie Keough has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »