£20,000 yearly passive income? Here’s how much you need in an ISA
Building a passive income stream as high as £20,000 per year is a daunting idea. For those on relatively average salaries, work often decades of tireless frugality, saving, and investment. The rewards of an earlier retirement or financial freedom are often worth it.
A Stocks and Shares ISA is an ideal place to build such a passive income. Anyone can open one with a few taps on a smartphone. It takes seconds to invest in all manner of stocks from around the world. The 0% tax on everything inside the account isn’t bad either.
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.
How much is needed to hit that £20,000 a year figure? That all depends on the drawdown rate. A 4% yearly withdrawal is considered somewhat safe. That would require £500,000 in total. Some aim for 5% by way of high-yielding dividend stocks. That would require £400,000.
Working well
One strategy to achieve such high net worth (and one that is getting more and more popular these days) is index funds. These funds track entire markets like the UK FTSE 100 or the US S&P 500. Folks put their savings in and hope for 8%-10% (in line with historical averages).
While this is an easier investing plan, it comes with several disadvantages. The primary downside, to my eyes, is that the incredible success of an index’s best companies is smoothed out by the rest. Rolls-Royce (LSE: RR.) shares are up 20 times (over 2,000%) since the delightful era of the Liz Truss premiership. The Footsie is up just 38%.
That’s not to say stock picking is a walk in the park. Even the best investors make lots of mistakes. American investor Peter Lynch famously said he aimed for ‘six good picks out of 10’. It worked out for him, though. He’s a billionaire.
Long way to go
Though such rapid gains are unlikely from here on in, I still think Rolls-Royce is worth considering today. The manufacturing giant has many a string to its bow, including engines for aircraft, power systems, and defence applications, too.
Take small modular reactors (SMRs) for instance. These are like tiny nuclear power stations. Their small size means they are easier to manufacture, but they can still power a million homes each.
Countries including the Czech Republic, Sweden, the Netherlands, and Hungary have already signed contracts with Rolls-Royce or are in some kind of partnership on the issue. Even the UK is getting in on the act with Great British Energy committing £2.5bn in a recently completed deal.
The viability of SMRs is still uncertain. The only commercially working one is on a lake in Russia. The prospect of using these small nuclear power stations for energy is one for the 2030s or perhaps even later.
But there is a chance that SMRs will be the perfect counterpart to solar and wind energy generation in a greener, Net Zero future. In that case, the Rolls-Royce share price might have a long way to go yet.
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John Fieldsend has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. 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.
