How much do you need to invest in the stock market to quit work and live off dividends?
Like most investors, I’m saving cash each month for the sole purpose of investing in the stock market, with the goal of eventually reaching financial freedom. After all, who doesn’t love the idea of just quitting work and living off dividends from an ISA for the rest of their life?
But is this realistic? And how much money would someone need to invest to make this happen?
Living comfortably
To know how large a portfolio needs to grow, it’s crucial to know how much passive income is needed. And that ultimately depends on the desired lifestyle. But for those looking to simply live comfortably, the Pensions and Lifetime Savings Association estimates individuals need to earn around £44k a year.
Using the average stock market dividend yield of 4%, to earn this level of income, an investment portfolio would need to be worth around £1.1m. While there may be a lucky few with this already in the bank, most people don’t have that kind of money lying around. The good news is, combining patience with consistency can lead even modest investors to steadily build towards a seven-figure portfolio over time.
For those keeping things simple with an index fund, that means the journey could take as little as 21 years, assuming UK shares continue to deliver an 8% annualised return (which they may not, of course).
| Monthly Contribution | £250 | £500 | £1,000 | £1,667 (Max ISA) |
| Time to reach £1.1m | 43 Years | 35 Years | 27 Years | 21 Years |
Let’s speed things up
Instead of passively relying on index funds, investors can take a more active approach with stock picking. There’s no denying the approach to investing carries significantly more risk. But when executed correctly, it can unlock phenomenal returns that drastically accelerate the wealth-building timeline.
Games Workshop (LSE:GAW) is an example of this to consider. The niche Warhammer miniature manufacturer has gone through some rough patches over the years. But by developing a rich, immersive world and addictive hobby, the company has slowly nurtured immense pricing power over the last 20 years.
The result? Consistent double-digit revenue growth and expanding operating profit margins that now stand at a staggering 40%. And with the company now exploring new high-margin opportunities through licensing its intellectual property (IP), profitability and growth look set to continue for many years to come.
Consequently, shareholders have enjoyed a staggered average annualised return of 20.6%. And at this rate, the journey to £1.1m is shortened drastically.
| Monthly Contribution | £250 | £500 | £1,000 | £1,667 (Max ISA) |
| Time to reach £1.1m | 22 Years | 18 Years | 15 Years | 13 Years |
Taking a step back
As exciting as the outlook seems for Games Workshop, maintaining this level of returns moving forward seems unlikely. After all, it’s now a far larger enterprise. And with the risk of tabletop gaming losing cultural relevance or 3D printing technology undercutting pricing power, the company could find itself under increasing pressure.
At the same time, there have been plenty of other promising UK shares that haven’t come close to this level of stock market outperformance.
In other words, picking individual stocks doesn’t always work out. But by taking a disciplined and measured approach, risks can be managed. And given the potential rewards, it’s an endeavour worth pursuing on the journey towards financial freedom. At least, that’s what I think.
The post How much do you need to invest in the stock market to quit work and live off dividends? appeared first on The Motley Fool UK.
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Zaven Boyrazian has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Games Workshop 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.
