How much do you need in an ISA to target a £2,500 monthly income?
A second income is a game-changer in retirement. One of the most tax-efficient ways to build it is with a Stocks and Shares ISA. While ISAs donât offer upfront relief like a Self-Invested Personal Pension (SIPP), all capital growth and dividend income is sheltered from taxes. This makes a huge long-term advantage.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Every tax year, investors can put up to £20,000 into an ISA. Thatâs a decent allowance, but it still leaves the big question: how much is needed in the pot to draw a sizeable passive income of, say, £2,500 a month in retirement?
Retirement planning
One widely used yardstick is the 4% withdrawal rule. It suggests that withdrawing 4% of a portfolio annually should make the money last indefinitely. On that basis, £2.5k a month, or £30,000 a year, would require £750,000.
Thatâs a daunting figure, but not impossible. Over 25 years, investing just under £800 a month and generating an average annual return of 8% could hit the target. That falls to £525 a month if you can stay invested for 30 years.
NatWest shares have soared
One name that catches the eye right now is NatWest Group (LSE: NWG). The FTSE 100 bankâs share price has soared 60% over the last year and a huge 318% over five years (better still, all dividends are on top). Thatâs impressive, yet the valuation still looks reasonable, with a price-to-earnings ratio of just 10.2. A figure of 15 usually represents fair value.
NatWest is benefiting from two big factors: healthy profits across the banking sector and the government finally selling its last stake, meaning all decisions are now fully commercial. In half-year results on 25 July, operating profit jumped 18% to £3.6bn, beating forecasts. The bank also unveiled a £750m share buyback and hiked the dividend 58% to 9.5p per share.
Income seekers may like the yield too. While the trailing figure has now fallen below 4%, itâs forecast to reach 5.5% in 2025 and a mighty 6.16% in 2026.
FTSE 100: risk and reward
No stock is without risk. Banks have been rocked by regulatory issues in the past, from rate rigging to mis-selling. NatWest is also vulnerable to a slowing UK economy, while falling interest rates could squeeze margins. Thatâs why it makes sense to hold around 15 stocks across different sectors, so one setback doesnât derail the whole plan.
For investors willing to give it time, dividend shares like NatWest can be a powerful way to build a second income. The miracle of compound returns works quietly in the background, and over decades it can make a dramatic difference.
Reaching a £750,000 ISA isnât quick or easy, but with steady contributions and a focus on quality dividend payers, a £2,500 monthly income could be within reach. Even falling short should still mean a far higher second income than would come from doing nothing at all.
The post How much do you need in an ISA to target a £2,500 monthly income? appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls Royce right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls Royce made the list?
More reading
- After recording a 52-week high, is there any value left in the NatWest share price?
- Just how high can the skyrocketing NatWest share price go?
- Still at a bargain-basement price, is it time for me to buy more of this FTSE 100 banking star?
- Prediction: check out the eye-popping NatWest share price and dividend forecast
- 1 surging FTSE 100 bank to consider putting into a £20k Stocks and Shares ISA
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.
