£25k in savings? Here’s how I’d try and turn that into passive income worth £12k a year

By investing in UK and US shares at knockdown prices I hope to generate a five-figure passive income stream before I come to the end of my career.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I retire, which I expect will be at least a couple of decades from now, I hope to top up my pension earnings with passive income from my Stocks & Shares ISA. Collectively, these earnings could make my retirement more financially comfortable and enjoyable.

For the last decade, I’ve been investing in UK and US stocks as part of my strategy to build a portfolio large enough to support me through my retirement. Needless to say, the money invested over that period has added up over time.

However, millions of Britons are sitting on savings that won’t deliver life-changing returns over the long run due to negative real rates. So with £25,000 in savings, I could look to put that money to work by investing in stocks and funds.

Should you invest £1,000 in Admiral right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Admiral made the list?

See the 6 stocks

While investing may sound inherently more risky to many people, a well-diversified portfolio can actually help manage risk over the long term. Here’s how it’s done.

Mitigating risk

Funds, ETFs (exchange-traded funds), and trackers offer cost-effective ways to spread investments across multiple companies, sectors, and geographical regions.

This allows us as investors to mitigate the impact of poor performance from any single investment. These instruments also allow investors to gain broad market exposure, possibly balancing between US, UK, and global markets.

Historically, stock markets have shown strong long-term growth potential. From 1900 to 2023, US stocks returned 6.4% annually in real terms, while UK stocks delivered 5.3%.

Source: TradingView — Performance of S&P 500 and FTSE 100 over time.

Looking at slightly more recent statistics, the S&P 500, a benchmark for the US stock market, has delivered an average annual return of about 10.7% since its introduction in 1957.

This outpaces inflation and many other forms of investment. We can gain access to these returns by simply investing in trackers funds or purchasing shares in sector specific funds.

Taking this 10.7% rate of return and assuming I can replicate that over the coming decades, it would take 20 years for me to turn my £25,000 into a portfolio that could deliver £12,000 a year.

A sensible choice

There are many ways to invest, and this depends on circumstances and on our objectives. Personally, given my profession and the fact that I put money into my ISA monthly, I prefer to pick one or two new stocks every month — often re-picks.

However, if I were starting investing with a lump sum today, I’d consider spreading my money across funds and ETFs, like the Vanguard S&P 500 UCITS ETF GBP (LSE:VUSA).

It’s among the most popular ETFs for good reason. It simply tracks the performance of the S&P 500 index, offering European investors easy access to the US stock market. It provides exposure to 500 of the largest US companies, representing about 80% of the US equity market capitalisation.

It also stands out for its low cost, with an expense ratio of just 0.07%, significantly lower than many actively managed funds. It’s highly liquid, making it easy for investors to buy and sell shares without incurring large spreads or transaction costs.

Of course, even the most diverse of funds can go down as well as up. Recessions, trade wars, and actual wars could also negatively impact the performance of US stocks, and this ETF. Nonetheless, short, medium, and long-term performance has been very strong.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

James Fox 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »