On the often-cited 4% safe withdrawal rate, a £40,000 yearly passive income (or £3,333 a month) would take a pretty penny indeed. The amount needed would be £1,000,000! And even if someone had a cool seven figures lying around, there are deposit limits to ISAs. That means it would take over two decades to deposit – otherwise lots of tax to pay too!
What if an investor did want to build up to that amount? That would mean becoming a millionaire through saving and investing. That might work for big earners, but hitting a million pounds in an ISA is just a pipe dream for most of us. Or is it?
Ifs and buts
Building wealth in an ISA comes down to three very simple things: money invested, the rate of return and… time. Boiling it down to these core details and seeing what happens can reveal something counterintuitive: even average investors can end up with impressive rewards.
Let’s run a very average calculation. The average Briton has around £20k in savings and saves an additional £250 a month (roughly). Now let’s combine those amounts with a historically average 10% rate of return and an average investing timeline of 30 years. What’s the end total? Around £868,811.
There are very many ifs and buts in that number crunching. Past returns are no guarantee of future returns, for one. And inflation over time will erode the value of the cash as well. But I think it serves to show that with the right plan and a touch of luck, seemingly difficult goals can be within reach.
One problem though: we did not hit the million mark! There are ways to bump up the overall figure, perhaps by saving more or investing for longer. One way I and many others choose to follow is individual stock picking.
A good buy?
The idea of finding undervalued shares on the stock market to turbocharge returns is hardly a new one. But it’s worth repeating nonetheless. A housebuilder like Persimmon (LSE: PSN) sounds like a simple company to invest in, yet it has proven very lucrative in the past.
Over the 2010s, as the housing market boomed, Persimmon went up close to 10 times in value in over a decade. While an investor is not going to pick up every stock before its share price surged, even just one or two in a portfolio can make a big difference.
Is Persimmon a good buy today? On the surface, it seems like the answer is no. The housebuilding sector is dealing with a raft of problems at the moment. Persimmon has seen its earnings crater in the last few years due to rising inflation up and down the supply chain.
But housing is notoriously cyclical, and long-term demand for new builds in this country is very strong. It could be a while before good times start to roll, but Persimmon is one stock that could be good for budding passive income investors today. I’d say it’s worth considering.
