4 steps I’d take to try and turn £10k into a £29,495 passive income

Investing in UK shares can be a great way to build a passive income. But investors need a strategy to reach their goals, says Royston Wild.

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Making a healthy passive income with UK shares isn’t a simple task. But it can be made much easier by establishing and following some core rules at the start of one’s investing journey.

Here are a handful I think could help me turn a £10,000 lump sum into a solid income in retirement.

1. Open a Stocks and Shares ISA

We love the Stocks and Shares ISA here at The Motley Fool. There are certain restrictions to these products: the annual investment limit sits at £20,000, and any unused allowance can’t be rolled over to the next tax year.

But critically, investors don’t have to pay the tax man a single dime on any capital gains or dividends. This can make a massive difference to one’s eventual returns.

2. Invest in FTSE 100 and FTSE 250 shares

Investing in small-cap growth stocks can provide explosive returns. But I’d prefer to take a lower-risk strategy and buy FTSE 100 and FTSE 250 shares.

Why wouldn’t I? Since its creation in 1984, the Footsie has delivered a tasty average annual return of 7.5%. The FTSE 250, meanwhile, has provided an even-better return of 11% since it began in 1992.

If this trend continues, a £10,000 invested equally in a diversified collection of shares from these indices would turn into £158,688.70 after 30 years. That’s excluding any trading fees I might incur.

3. Make regular cash injections

That’s an excellent return on such a relatively small initial investment. But I’d be targeting an even higher sum to set me up for retirement by making regular additional investments.

Let’s say I put an extra £300 a month into my Stocks and Shares ISA. After three decades my nest egg could swell to £737,369.05.

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.

4. Draw down 4% a year

So how would I turn this amount into a regular passive income? One option would be to draw down 4% of this retirement pot each year.

The 4% withdrawal rule ensures that I can sustainably receive income for 30 years before the well runs dry. It’s a formula that would turn that £737,369.05 into a yearly income of around £29,495.

A top stock I’m looking at

Remember that there are no guarantee of making a positive return with UK shares. Investors must do plenty of research before pressing the ‘buy’ button to boost their chances of success.

What’s more, share pickers should always do their own research and not just rely on others’ tips (although experts like The Motley Fool can be a great place to find investment ideas).

One Footsie share I’ve thought about adding to my own ISA is United Utilities Group (LSE:UU.). It’s the sort of safe-and-steady stock that, when complimented with a spattering of higher-risk shares, can form part of a winning portfolio.

The business supplies water to 7.4m customers in the North West of England. Its operations are very defensive — it faces no competitive threats, and demand remains stable year after year — which in turn allows it to provide reliable returns to its shareholders.

On the downside, the water sector is heavily regulated and rule changes by Ofwat could damage future earnings. And at the moment the industry is under close observation over issues like environmental policy.

But with a price-to-earnings growth (PEG) ratio of 0.5 and 4.8% dividend yield, I still think it could be an attractive investment for me.

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.

Royston Wild 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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