£5K in savings? Here’s how I’d turn that into £11,438 of annual passive income!

This Fool explains how she’d invest to create a passive income stream to enjoy later in life and breaks down the steps she would follow.

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One of my biggest reasons for investing in UK shares is to build a passive income stream for me to enjoy when I retire.

Let me share how I would aim to do this, as well as an example of a dividend stock I’d buy to help me achieve my goal.

The method and the maths

First things first, let’s say I have £5K in savings right now. On top of that, I’d want to add £200 per month from my wages to top up my pot.

I need to ensure I’m making my money work hard, and pay the least amount of tax possible, so I can enjoy my earnings. For me, a Stocks and Shares ISA is perfect, as I don’t need to pay any tax on 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.

Next, I need to aim to find between 5 and 10 quality stocks with good fundamentals, future prospects, and a decent rate of return.

Crunching some numbers, with an initial £5K, and adding £200 per month, I’m going to invest for 25 years, and aim for a rate of return of 7%.

After this time period, I’d be left with £190,641. For me to enjoy this, I’m going to draw down 6% annually, which equates to £11,438.

At this stage in my life, I’ll have paid off my mortgage and my kids won’t be relying on the ‘bank of Mum’ anymore, so this is a nice pot for me to use on whatever I like.

Of course, this plan has a couple of risks. The biggest issue is that dividends are never guaranteed. Plus, although I’d be aiming for 7%, the eventual payout could be less as stocks come with risks that could hurt returns. Alternatively, it could be more, leaving me with more money.

Asset manager

FTSE 100 wealth manager Schroders (LSE: SDR) is a stock I like the look of for a few key reasons.

Firstly, it’s worth mentioning that the Schroders share price has been the victim of economic pressures recently. The shares are down 14% over a 12-month period from 458p at this time last year, to current levels of 390p.

This drop in price doesn’t concern me. In fact, it makes the shares look even more attractive on a forward price-to-earnings ratio of 12.

Next, a dividend yield of 5.4% is attractive. It’s much higher than the FTSE 100 average of just less than 4%.

Furthermore, Schroders is an established business. With over £750bn worth of assets under management, according to most recent figures, the business is mammoth. In addition to this, the firm has been around for over 200 years. It’s fair to say it knows a thing or two about navigating tricky economic conditions, making money, and rewarding investors.

Despite the bullish traits I’m drawn to, I’m worried about inconsistent inflows in recent years, linked to lower investor confidence. This is primarily linked to the economic turbulence of recent times. With less assets to manage, making money, and rewarding investors can be tougher. This is something I’d keep a close eye on.

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.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders Plc. 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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