Here’s how I’m planning for a £2,300 a month second income

Oliver Rodzianko gives us the lowdown on his plan for a healthy second income in retirement. He reckons investing is his path to financial freedom.

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I absolutely love planning my finances. While others may find this boring, there’s something adventurous to me about slowly building a cache of money over time. My end game strategy is to have a second income in retirement that will pay all my bills, as long as my mortgage is fully paid off. Here’s how I plan to do it.

Rules of the game

The game goes like this. I have to work incredibly hard, as without that, there’s no way I can earn enough to pull off these two goals:

  1. Get a mortgage on a house and pay it off by the time I retire
  2. Build up a £500,000 investment portfolio, independent of the equity in my home

Now, that’s quite a daunting challenge, but I think it’s possible. I’d need to start with just £5,000 and invest an extra £200 a month over 25 years at a total yearly return of 12.5% including price gains and dividends. That would get me to roughly £500,000.

What’s great is that I plan to do all of my investing through a Stocks and Shares ISA. So, I won’t have to pay any tax when I come to sell my investments, or when I receive dividends.

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.

Now, to hit my £2,300 a month dividend income target, I’d need a range of companies yielding 5.5% per year, as well as ririsng in price regularly. Of course, the risk is that this doesn’t happen.

Shares like these

I like businesses like Record (LSE:REC), which is a currency management firm in the UK. It offers a dividend yield of 6.8%. That’s more than I bargained for, but one thing I’ve learned is to have low expectations and overachieve on them.

I like that the business has a very stable balance sheet. It has less than 20% of its assets balanced by different forms of debt. Also, it’s growing very fast. Over the past three years, its earnings have grown at a 20.7% rate as an annual average.

Also, because the shares have grown in price consistently, if I’d bought them five years ago, I’d be getting 11% of my initial investment every year in dividends now. That’s because the dividend yield applies to the present price, not what I initially paid.

However, I also need to be aware of the risks if I invest in Record. One of the main ones is that its assets are growing faster than its revenues, which can be an indication that the business is becoming less efficient. Over time, this could reduce how fast the shares grow in price.

Covering my bills

If I can build up a portfolio of five to 10 quality and high-dividend businesses like Record, I’ll have great diversification that will help to protect me from anything going wrong in one company.

If all of these businesses average out to a 5.5% dividend yield, I’ll have £27,500 a year. That will also be tax-free because of my ISA.

With that, I might not be taking luxury holidays, but it will certainly give me the ability to do many of the things that I enjoy and live a nice, stress-free life without any active work. To me, that’s true financial freedom.

At the moment, Record is on my watchlist, and I might invest when I have some more spare cash.

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.

Oliver Rodzianko has no position in any of the shares mentioned. 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.

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