For most people, a monthly second income of £3,000 could go a long way towards helping them achieving financial independence in retirement.
Given the ongoing debate about State Pension levels and eligibility, securing a supplementary income stream is essential, in my view. The good news is that securing a life-changing passive income is a realistic target with a well-diversified portfolio of global shares and other assets.
For a regular £3k monthly income, an investor may need a Stocks and Shares ISA of £900,000. That’s based on an annual drawdown rate of 4% that would likely provide a lasting income for life.
That looks like a colossal amount of cash. But as the thousands of stocks ISA millionaires in the UK will tell you, it’s quite possible with a patient and structured approach.
The ISA route
The first thing to say is that using a Stocks and Shares ISA is a critical part of building long-term wealth. It’s the most generous investing product on the planet, and Britons who are serious about building long-term wealth should give it a close look.
The £20,000 annual deposit limit is more than enough for most people. And they protect investors from the cost of paying capital gains tax and dividend tax, savings that can be invested instead to speed up the wealth-growing process.
What’s more, unlike other savings products (including the Self-Invested Personal Pension (or SIPP), individuals don’t have to pay income tax on withdrawals. As a consequence, investors don’t have to factor in tax grabs when calculating their portfolio targets.
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.
Stick to a plan
The second essential thing to think about is committing to making regular investments. Why? Because making your money work for you consistently over time is how wealth grows.
The typical Briton invests just over £500 a month in the stock market today. Those that can keep this up and achieve a 9% average annual return on their cash could turn this sum of money into £915,372 over 30 years.
A retirement fund of this size would comfortably support the £3,000 monthly passive income we’re targeting.
Is that sort of return possible in the real world, though? It’s important to note that many won’t achieve this. But given the average long-term stock market investor achieves 8% to 10%, the answer is yes, it can be done.
Building our portfolio
With an ISA set up and investment plan sorted, it’s time to think about what to buy.
There’s no one-size-fits-all approach here. We all have different risk tolerances and investing styles. But there’s one universal truth: investors who spread their cash across different share categories, regions and sectors and have a better chance of building wealth.
This is where diversified products like investment trusts and exchange-traded funds (ETFs) can help. The Polar Capital Technology Trust (LSE:PCT) is one that could supercharge portfolio growth and demands consideration, I feel.
It invests in 92 different global technology stocks. This reduces the impact of one or two underperformers on overall returns, whilst allowing investors to harness the full potential of fast-growing segments like artificial intelligence (AI), robotics, cybersecurity and quantum computing.
The trust’s excellent returns speak for themselves. Since 2015, it’s delivered an average annual return of 22.6%. That’s more than double the 9% target in our above example. I’m optimistic it can continue delivering, even though it can underperform during economic downturns.
