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The stock market is my number-one choice for building the passive income because I want to enjoy my retirement to the max.
Actually, I’ll narrow that down. FTSE 100 shares are the best way I know of targeting a passive income. Especially since I can buy them in a Stocks and Shares ISA, where all my dividend income and share price growth should be entirely free of tax.
Income for life, tax free
If I was younger and had no long-term savings, I’d want to crack on without delay. Now is a great time to start investing, because FTSE 100 shares look cheap and many offer dividend yields of more than 6% a year.
Few of us are feeling flush these days, and the young have it particularly hard. Yet a 30-year-old who could afford to set aside £5 a day for their retirement would be amply rewarded in the longer run (provided they stick with it).
Many young people think investing in shares is risky, and it’s true that stock markets can be highly volatile over short periods. However, history shows that in the longer run, equities beat almost every other investment. Over the last 20 years, the FTSE 100 has delivered an average total return of 6.89% a year, from both dividends and growth.
Now let’s say a 30-year-old started investing £5 a day, which adds up to just over £150 a month, or £1,825 a year. Then let’s assume they increase that by 3% a year, to help maintain its value against inflation.
If their portfolio matches the FTSE 100’s average long-term return, they will have a whopping £440,393 by age 67. Their contributions would have totalled £120,768, but their profits would have vastly exceeded that at £319,625.
It’s a long-term process
In another assumption, let’s say that their portfolio was generating dividend income of 5% a year at that point. This would generate passive income of £22,020 a year. Their £5 a day would have turned into £60 a day. With luck, this income would continue for life. It might even grow.
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These figures aren’t guaranteed, investing in shares never is. My theoretical 30-year-old could generate a lot less than that, or a lot more. It depends how markets and stock picks perform. Equities offer higher potential rewards, but with higher risks.
Also, that £22,020 income will be worth less than it is today, sadly, due to inflation. Personally, I’d recommend investing more than £5 a day, if possible. I’d also suggest starting well before 30.
There are loads of FTSE 100 shares I’d love to buy right now. In recent weeks, I’ve added Lloyds Banking Group, Legal & General Group, wealth manager M&G and consumer goods giant Unilever to my portfolio.
I’ll reinvest all my dividends back into my portfolio today, and draw them as passive income when I retire.
