How much do you need in an ISA to target a £20,000 passive income at 60?

It might be obvious that the sooner we start saving and investing, the better our chances of reaching 60 with some decent passive income in the bag.

How much we need depends on how much we hope to withdraw. There’s a rough rule that suggests taking 4% per year.

The idea is that should still leave enough capital to grow with inflation for the future. Based it on that, the sums are easy. We need Â£500,000 by age 60 to take out Â£20,000 per year.

25 years? Nah!

That’s not a trivial task. But the miracle of compound returns makes it look more achievable.

What we need to do is reinvest any dividend cash we get into new shares. And then those new shares earn us extra dividends next year, which we then can use to buy even more shares… and so on.

Over the past 10 years, the average Stocks and Shares ISA has returned 9.6% annually. That’s ahead of the annual FTSE 100 average over the past 20 years, approximately 7%. Let’s take the more conservative of those two figures.

How soon?

Invest the full ISA limit every year in shares, and buy new shares with all dividend cash. With an annual 7% return, we could reach the half million in a bit less than 15 years.

Someone age 45 today could reach Â£500,000 by 60. But… a 40-year-old who starts today could have Â£850,000 by the same age. Starting just five years earlier could result in a 70% bigger passive income pot!

Now, we can’t all reach the ISA limit every year. But whatever we can afford to invest, the key thing is that starting sooner can make a huge difference.

Starting earlier could make another difference too.

Empire strikes back

We all dream of finding the elusive multi-bagger. And the more years we have at our disposal, the better our chances. Looking at what’s happened to Empire Metals (LSE: EEE) reminds me of that — it’s up 460% over the past 12 months, and more than 1,000% in five years.

Even with such a rise, Empire has crashed more than 90% since 2010 — click the ‘ALL’ link in the chart above to see.

It’s a mining explorer, going after precious and rare metals. Companies like that can be very risky. And once they get way down in penny-share territory, they often never make it back.

But then, the company made a titanium discovery in Australia in 2023, which gave it a boost. And now we have some clues of the size.

An update on 14 October described it as “One of the largest and highest-grade titanium resources reported globally.” Estimates suggest there’s more than 200m tonnes of titanium oxide down there.

Balance is best

I’m not saying we should pin our passive income hopes on finding big winners. In fact, it’s easy to lose 100% on a speculative investment like this. As it happens, Empire shares have already fallen back from September’s peak.

But the more years of investing ahead of us, the more we can consider risking a small amount on a stock like this. I’m thinking about it for my ISA.

The post How much do you need in an ISA to target a Â£20,000 passive income at 60? appeared first on The Motley Fool UK.

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Alan Oscroft 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.