How investing just £50 a month could give me a £10k passive income for life at 65

Harvey Jones is surprised to learn how little he needs to invest to generate a large passive income in retirement. The key is to start early.

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As my retirement age edges closer, I’m working harder and harder to build a passive income to top up my State Pension. Primarily, I’m doing that by investing in a portfolio of high-yielding FTSE 100 shares.

The big question every investor faces – and many choose to ignore – is how much to put away each month to generate enough income. There’s no definitive answer, which makes the process harder. It depends on variables such as how long there is before retirement and how chosen stocks perform. I’ll give it a go though.

I’m after a large nest egg

Let’s start by setting a nice round income target of £10,000 a year. I’d need £166,667 to achieve that, assuming my portfolio yields 6% a year, as it does at the moment,

That’s comfortably above the FTSE 100 average of around 4%, but I’ve given it a lift by investing in high yielders like Phoenix Group Holdings (LSE: PHNX). I bought the insurer in January because I was dazzled by its 10% yield and dirt cheap vaulation. Yet I was also baffled. The dividend looked secure, so why wasn’t everyone else buying it too?

I decided to take a punt, and I’m glad I did. The Phoenix share price jumped 10% on 22 March after the board announced it had achieved its 2025 growth target two years early, helped by £1.5bn of new business cash from its Standard Life operation.

Instead of cutting its dividend, as I feared, the board increased it by 2.5%. It also announced plans to cut debt by £500m and further strengthen its already solid-looking balance sheet. I’m not expecting a heap of share price growth from Phoenix, it’s a long time since FTSE 100 insurers have delivered that, but I’m hopeful of a handsome dividend stream.

Start early, stick with it

If I was just starting out at age 25, I could smash my £166,667 target by investing just £50 a month. This assumes I increase my contribution by 3% a year, and generate an average annual total return of 7%. If I did that, I would have £187,984 by age 65. With a 6% yield, that would give me a passive dividend income of £11,279 a year.

If I was 40 though, I’d have to invest £160 a month. Under the same assumptions, that would give me £171,217 by age 65, which would generate income of £10,273. Starting at 50 I’d have to put away much, much more to hit the same target. Investing £450 a month would give me £173,494 and a £10,409 second income.

Clearly, it pays to start early. But even if I’d left it late, that £10k income target looks doable.

Of course, there’s a risk my stocks could underperform, and that yield could drop. Plus the real value of my £10k will be eroded in real terms. So I’d hope to build a much bigger portfolio than that.

But the underlying principal holds, namely investing regular monthly sums in top FTSE 100 dividend stocks that can transform my retirement. It just takes time.

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.

Harvey Jones has positions in Phoenix 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.

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