£20,000 in savings? Here’s how I’d aim for £17,896 in income with FTSE 100 shares

Our writer explains how he’d try to turn a lump sum into a five-figure income stream by investing in FTSE 100 (INDEXFTSE:UKX) stocks.

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With an initial lump sum of £20,000 and regular monthly savings of £242, I believe the FTSE 100 could help me generate a healthy level of passive income for my retirement.

The index is home to the stocks of many reputable companies with strong balance sheets and well-known brands.

But there are no guarantees when it comes to investing. Shares can go up as well as down. However, history suggests that a well balanced portfolio can deliver long-term growth and impressive passive income.

Ground zero

Personally, if I was starting my investment journey again, I’d use a Stocks and Shares ISA because all income and gains in it are free of tax.

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.

If possible, I’d also look to invest on a monthly basis. Saving a little amount frequently can help boost long-term returns.

Latest figures from the Office of National Statistics reveal that the average UK household has annual disposable income of £32,300 and saves approximately 9% (£242 a month).

I’d use this sum to buy more shares in the UK’s largest companies.

However, it would only be possible to start adding to my ISA in the second year, as there’s an annual limit of £20,000 on the amount that can be invested.

Identifying winners and losers

In my opinion, it’s essential to do some research before deciding which stocks to buy.

Initially, I’d aim to buy half a dozen or so. Too few and any weak performers will seriously damage returns. Too many and it will be difficult to keep track of things.

Prior to investing, I like to look at annual reports and trading updates to identify potential warning signs. In addition, I use some popular valuation metrics to assess whether a stock is fairly valued. I also consider broker’s recommendations although I don’t slavishly follow their opinions.

A possible option

One FTSE 100 stock that I have in my ISA is HSBC (LSE:HSBA).

Analysts are expecting earnings per share of 98p-100p in 2024, 2025, and 2026. The bank’s shares are therefore currently trading on a multiple of around seven times’ forward earnings. This is comfortably below the FTSE 100 average of 10.65. And it is also lower than the bank’s 2018-2023 average of 12.9.

Of the 17 brokers covering the stock, nine say ‘buy’, six are neutral and two are advising their clients to sell.

However, as much as I’m a fan of the bank, I do have concerns about its exposure to China’s property market. The risk of loan defaults appears to be increasing. The sector is also holding back growth in the wider economy, on which HSBC is heavily reliant.

Others appear worried about the sudden retirement of its chief executive, Noel Quinn. But his total remuneration package was $10.64m in 2023, so I can understand his decision!

Despite these risks, I think the bank could help me achieve my target of at least matching the long-term growth rate of the FTSE 100.

Since the index was created in January 1984, it has recorded an annual growth rate (with dividends reinvested) of approximately 8%.

If this return continues, a lump sum of £20,000, topped-up with a monthly investment of £242 from the second year onwards, could turn into £357,930, over 25 years.

Drawing down 5% of this each year would give me annual passive income of £17,896.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Beard has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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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