How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65?
Building a passive income from a portfolio of FTSE 100 shares is a brilliant way to supplement the State Pension on retirement, in my view.
With the end of the tax year looming (5 April), now’s the perfect time to get stuck in, by maximising this year’s Stocks and Shares ISA allowance.
This flexible and tax-efficient account can be a brilliant way to generate a tax-free second income, particularly for those looking to build a second income stream.
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 shares offer dividends and growth
Investing in a balanced portfolio of FTSE 100 shares could be the key to hitting that goal. By carefully selecting stocks that balance risk, growth, and income, investors can benefit from steady dividend payments and capital appreciation.
Companies with strong business models, loyal customers, and steadily rising revenues tend to make reliable long-term investments.
One such stock to consider is Admiral Group (LSE: ADM). The motor insurer has bounced back from a tough time, with its share price rising 13% in the past 12 months, and 56% over two years. Full-year results, published on 6 March, highlighted this impressive growth.
Pre-tax profit jumped 90% to £839.2m, driven by strength in its UK motor business. Group turnover climbed 28% to £6.15bn. The board also reported a 14% increase in customer numbers, reaching 11.1m.
Admiral’s faced some difficult years, as claims-cost inflation hit the insurance industry, squeezing margins. It’s a highly competitive sector, as customers relentlessly search for cheaper premiums on comparison sites. During the cost-of-living crisis, they’ve doubled down on that.
However, Admiral’s rebound highlights its underlying strength. Investors will also be drawn to its attractive 6.1% trailing dividend yield, although it’s important to remember that dividends are never guaranteed.
Despite its recent share price rise, Admiral still looks fairly valued, with a price-to-earnings ratio of 13.8.
Buy dividend stocks and stick with them
Generating a monthly passive income of £1,000 (£12,000 a year) in retirement requires a carefully-built investment portfolio, containing at least a dozen stocks from different sectors and with different risk profiles.
Assuming an average dividend yield of 6% a year, an investor would need a total portfolio of around £200,000 to reach that income target.
Building this sum from scratch over 20 years is achievable with disciplined investing. If a 45-year-old investor starts now and their portfolio delivers an average 7% annual return, broadly in line with the long-term FTSE 100 average, they’d need to invest £385 a month to hit the £200k target by age 65.
By selecting high-quality stocks that slightly outperform the market and achieve an average return of 9% a year, they could hit the same target by investing just £300 a month.
These figures show that even at 45, it’s not too late to start saving seriously. The key is to invest as much as possible, as early as possible, and to stay the course through market ups and downs.
Investing consistently in solid FTSE 100 dividend stocks could make all the difference come retirement.
The post How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65? appeared first on The Motley Fool UK.
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More reading
- As the Admiral share price jumps after profit nearly doubles, should I buy?
- Considering an investment of £10 a week in these UK dividend shares could result in a £1,727 passive income
- What should I buy next in my Stocks and Shares ISA?
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group 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.
