The full state pension in the UK is currently £185.15 per week. I’m concerned about what it might be when I get to retirement, so I’m looking to build my own passive income streams now.
By building my own asset base, I’m hoping that I won’t have to rely on the state when I reach retirement age. If there’s a state pension for me, great. If not, I’ll manage.
I’ve got a plan to earn the equivalent of the full state pension in passive income by myself. And it starts with putting money aside right now.
Save
Charlie Munger says that the most important part of building wealth is underspending one’s income. So the first part of my plan involves saving as much as I can.
I think that I’ll need around £240,000 in investments to achieve my passive income goals. That’s a lot, so it’s important that I get started straight away by getting money together to invest.
If I can save £666 per month, that will take me to my target after 20 years. That’s a lot to put aside, but even if I don’t manage that, anything I can save now will help me later on.
Fortunately for me, the next part of my plan involves finding ways to take some of the pressure off my required savings rate.
Invest
Having put as much as I can aside, the second part of my plan is to invest it. This should set me on the way to reaching my £240,000 target.
The point of doing this is to allow my money to compound without me having to do anything. If I invest £666 today and it compounds at 4% for the next 30 years, it will be worth £2,610.
In other words, investing £666 now and letting it grow at 4%, it can give me three months where I don’t need to save anything.
It’s important that I invest in the right places, though. I’ll need to find companies that can grow their earnings over time while also making sure that I don’t overpay.
Repeat
The third part of my plan is the most straightforward. It involves repeating the first two steps until I get to where I need to be.
Each month, I’ll need to save what I can and figure out the best places for me to invest the cash I have available. As the stock market shifts around, that might be into new opportunities.
In some cases, the investments I have will pay dividends. I’ll also want to make sure that I’m reinvesting these using the same approach that I use for putting new capital to work.
Fortunately for me, the process should get easier. As my investments develop, the amount that I’ll need to save each month should go down.
Getting started
I’m getting started with this plan straight away. There are two reasons why this is important.
First of all, according to Munger, the most difficult part of building wealth is the first £100,000. So I’ll get that out of the way as soon as I can.
Second, the money I invest today has the most time to compound. That’s an important part of my plan to make things easier in the future, so I stand to benefit by starting right now.