How much do you need in a Stocks and Shares ISA to target a stellar retirement income of £3,500 a month?
I love my Stocks and Shares ISA. It’s flexible, easy to use and all of the returns are free of income tax, dividend tax and capital gains tax… for life. Many investors use it to generate a tax-free passive income in retirement, and that’s my goal too.
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.
FTSE 100 dividends
How much investors need in their ISA to generate income £3,500 a month, or £42,000 a year, would depend on the yield on the underlying investments.
Many like to use the 4% rule when calculating withdrawals. If an investor draws that percentage as income each year they shouldn’t have to deplete their capital. However, this requires a large pot of money. To generate £42,000 a year, the ISA portfolio would need to be £1.05m. It’s possible to generate the same income from a smaller pot, by tapping into the capital as well.
It’s also possible to up the portfolio yield by investing in higher-yielding FTSE 100 dividend stocks. Let’s say the same investor bumps their yield to 5%. That would require a portfolio of £840,000. If they targeted a 6% yield, the required pot drops to £700,000. These are still big sums and it will take years to achieve them.
Someone who put away £575 a month and saw their investments grow by 7% a year would have almost £700,000 after 30 years. Compounding’s our friend here. Reinvesting dividends means the portfolio grows not just from fresh contributions, but from the dividends the shares generate which, in turn, generate more income.
BP — a top income stock?
At The Motley Fool, we prefer to buy individual stocks rather than tracker funds. One dividend growth stock I personally hold is oil giant BP (LSE: BP). It currently has a trailing dividend yield of 5.7%, comfortably above the FTSE 100 average of around 3.25%.
The share price has climbed just 2.5% over the past six months, but it’s up 90% over five years, with dividends on top.
BP’s a major energy player with a significant global footprint and a recent large oil discovery off Brazil, which could offset declining production elsewhere.
As well as the high dividend yield, BP’s also rewarding investors with share buybacks. But its shares have been volatile for years. Oil prices are notoriously cyclical, profits can swing sharply, and global events can quickly affect both income and share price. The transition to renewable energy adds uncertainty, as BP’s decided to stick mostly to fossil fuels.
Also, there’s been talk of an oil supply glut lately, and possiple price falls next year, which wouldn’t do much for the BP share price.
Despite that, I hold the stock and think it’s still worth considering, with a long-term view. Investors need to look past the ups and downs of the energy price cycle.
Building the portfolio
Diversification’s key. Holding a mix of high-yield, blue-chip dividend shares across different sectors smooths income and reduces the risk of relying on a single payout. Building a balanced Stocks and Shares ISA takes years but the rewards will definitely make it worth it.
Start early. Stick with it. Spread risk.
The post How much do you need in a Stocks and Shares ISA to target a stellar retirement income of £3,500 a month? appeared first on The Motley Fool UK.
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Harvey Jones has positions in Bp P.l.c. 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.
