For many investors, the dream of early retirement hinges on building a financial portfolio that can deliver a meaningful passive income. So what it would take to generate £40,000 a year at age 55?
Assuming a withdrawal rate of 5%, the maths is straightforward: an investor would need around £800,000 inside their Stocks and Shares ISA. At this level, a diversified portfolio could realistically produce the target income without running the risk of exhausting capital too early.
Reaching £800,000
The challenge, of course, lies in getting there. With the ISA allowance currently £20,000 a year, reaching £800,000 might sound daunting, but compounding can make the journey more achievable than many realise.
For instance, investing the full allowance annually into a portfolio delivering 7% average returns could grow to around £820,000 in 20 years. That’s assuming reinvested dividends and no withdrawals.
This shows the power of discipline and long-term compounding. Even starting from zero, consistent contributions combined with market growth can build serious wealth over a couple of decades.
Of course, not everyone can max out their ISA each year, but smaller contributions still add up. Investing £10,000 annually with the same 7% return would reach around £410,000 in 20 years — enough to generate roughly £20,000 a year at 5%.
It all depends on our personal situation. Personally, I’m a little further into my investment journey, and my returns are typically very strong. Here’s what I’m looking to achieve in graph form in the 23 years until I’m 55.
However, building towards £800,000 may require patience, consistency and a sensible investment strategy, but the numbers demonstrate it’s within reach. It is though, not without its risks. Investors can lose money, especially if they make poor decisions.
Can Micron power growth?
A good portfolio mixes the need for diversification with conviction. One stock I’m particularly fond of at the moment is Micron Technology (NASDAQ:MU). The memory-chip specialist is one of just a handful of companies globally that can produce the DRAM and NAND flash memory needed to power cloud computing, smartphones and, most importantly, the surge in artificial intelligence (AI).
Micron trades on a forward price-to-earnings ratio of around 20, which looks undemanding given consensus forecasts for earnings to grow more than 500% this year and continue rising strongly into 2026.
While the group carries $16.2bn in debt, it also has $10.8bn in cash, leaving a modest net debt position relative to its $182bn market-cap. This gives it scope to invest aggressively in new capacity while maintaining balance-sheet flexibility.
The risks shouldn’t be ignored. Memory pricing remains cyclical, meaning profitability can swing dramatically. Overcapacity or weaker AI demand could easily derail earnings forecasts. However, for investors willing to tolerate volatility, Micron offers rare exposure to one of the most powerful technology trends of the decade. It’s definitely worth considering.
