The idea of retiring early appeals to many people. Whether it is financially possible however, can sometimes be a very different question to whether it sounds attractive.
Instead of working myself, what if I could put my feet up and benefit from the hard work of staff at FTSE 100 firms like Vodafone and BP?
The answer is, I could. But how? My approach would be to build up passive income streams via a diversified portfolio of high-quality blue-chip shares.
Let me dig into the details of how that might work in practice.
Buying individual shares, not the index
The FTSE 100 index currently offers an average yield of 3.6%. One option would be simply buying into an index tracker.
But that would expose me to some shares I do not want to buy at all and others I think are overvalued. Instead, I would build my own portfolio of individual shares. That could also let me earn a yield well over 3.6% while sticking to large, successful companies.
In the current market I think a 7% yield, though well above the FTSE 100 average, should be achievable.
How I could aim to retire early
How much passive income that generates will depend on what I invest. That will vary for each person. If I wanted to target £20,000 annually to retire early, for example, I could hit that by investing £286,000.
A different approach to the same target could be to start putting away £1,000 a month. Compounding that at 7% annually, I ought to have a £286,000 portfolio in under 15 years. I could then use that to generate passive income.
That said, dividends are never guaranteed. So personally, I would want to build in a margin of safety between my projected financial needs and passive income. At a lower average yield, I would need to invest more to achieve the same passive income as in the illustration above.
Finding the right shares to buy
What sort of FTSE 100 shares might help me achieve my target? One that could is Phoenix (LSE: PHNX). I do not own this but would be happy to buy it if I had spare cash to invest.
The company is not a household name but some of its operating units are. Basically, it owns a number of large insurers, so has a customer base of around 12m. In fact, it is the country’s largest long-term savings and retirement business, administering some £283bn of assets.
That is a lucrative business. Phoenix has grown its dividend annually in recent years and aims to keep doing so. The 9.4% dividend yield is certainly attractive to me.
One risk to those payouts continuing at their current level is a severe property market downturn. If that happened, the value of Phoenix’s mortgage book could be negatively affected, eating into earnings.
But that is precisely why I do not plan to put all my eggs into one basket. I reckon a diversified basket of carefully-chosen FTSE 100 shares could offer me rewarding and, hopefully, fairly resilient passive income streams!
