One of the things I like most about investing in UK shares is that they pay income as well as provide capital growth. Many investors underestimate the importance of this, especially when starting out.
I currently reinvest all of the dividends I receive straight back into my portfolio, to buy extra stock. This way, I am loading up on even more UK shares without having to dip into my own pocket. What’s not to like about that?
When I retire, I plan to draw those dividends as income, to top up whatever I get from the State Pension and my company schemes. By doing this, I hope to leave the underlying capital untouched, and pass it on to my loved ones when I die.
I’m buying UK shares to retire on
In retirement, I plan to work to something called the 4% rule. This states that if you draw 4% of your portfolio as income, and leave the rest to grow, your money should never run out. I’ve set myself a target of generating a passive income of £24,000 a year from my portfolio. What does that mean in practice?
Under the 4% rule, I would need UK shares worth £600,000 to generate income of £24,000 a year. This is a tall order, although plenty of ISA investors have done far better than that. The UK is now home to thousands of ISA millionaires, who would generate a minimum £40,000 a year from their portfolios.
To save £600,000, an investor who started at age 25 would need to put away £250 a month, assuming their portfolio grew at an average of 7% a year. In fact, that would give them £640,000 by age 65. If they didn’t start saving until age 35, they would have to invest £350 a month.
As these figures to demonstrate, to generate a passive income of £24,000 a year from UK shares, it pays to start early (and stick with it).
My retirement is still 15 years away so I couldn’t say whether I will hit my goal. Even if I fall short, I will have more money for my retirement than if I had never tried at all. By investing in a Stocks and Shares ISA, the dividends I draw will be entirely free of income tax, which is a real boost.
I hope my passive income is enough
Also, that income will come on top of any State Pension I am due. Currently, the new State Pension pays a maximum of £9,110 a year. If I added that to my £24,000 target, I reckon I should have enough to live on. My only worry is that we might have a burst of inflation, so that £24,000 doesn’t have anywhere near the buying power as it does today.
On the plus side, thanks to my ISA allowance, nearly all of my income from UK shares should be free of income tax. Also National Insurance, which Britons no longer pay once they reach State pension age, currently 66.
I’m still some way short of the money I need. I’ll aim to put that right, by going shopping for more UK shares.
Like this one maybe.
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Harvey Jones 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.