I’m planning to fund my retirement by generating passive income from a portfolio of UK shares and global investment funds. I reckon it’s possible to generate income of £800 a month by investing as little as £3 a day. Here’s how I’d do it.
Investing isn’t easy, as the cost of living crisis squeezes everybody’s wallets. Yet paying £3 a day into a Stocks and Shares ISA can make a massive difference. It’s the cost of a daily cafe latte, and is a much better use of my money. I’ll happily make that sacrifice, if the reward is a healthy passive income when I finally stop working.
I’d invest in a ISA for tax-free returns
When saving for retirement, it pays to start early. If I was 25 (I wish) and starting from scratch, that £3 a day (or £90 a month) would have 40 years to compound and grow.
If I invested that amount in a diversified portfolio of UK shares and it grew at an average rate of 6% a year, it would be worth £175,200 by age 65. So how much passive income would that generate? There are two ways of calculating that.
Currently, a 65-year-old buying a single life level annuity with £100,000 would get income of £475 a month, or £5,700 a year, according to Hargreaves Lansdown. So by my reckoning, my £175,000 would buy me passive income of £831 a month, or £9,975 a year.
Most people no longer buy annuities, but leave their money invested via drawdown. If I did that instead, I would then follow the 4% rule and take that percentage of my savings as passive income each year, and leave the rest to grow.
That is known as the ‘safe withdrawal rate’. It means I can take 4% of my savings each year, without ever depleting my pot. Based on a £175,000 portfolio, that would give me passive income of £583 a month, or £7,000 a year. That’s less than the annuity but, crucially, I would still have control over my money. Also, my capital would still be there for me.
I’m actively building passive income
If I started investing for retirement at a later date, say 35, I would need to invest £5.75 a day, or £175 a month, to hit that £175,000 mark by age 65. My money would only have 30 years to grow in value. So I’d need to work harder to build the same passive income.
If I didn’t start saving until age 45, I would have to put away £12.35 a day, or £375 a month, to play catch-up. As these figures show, it’s never too early to start building up a passive income. It’s never too late either. I’d just have to work harder at it.