How much do investors need in an ISA to earn a £3,500 monthly passive income?
Itâs not so easy to save these days. With wages stagnant, taxes high and the cost of simply being alive in 2025 becoming more expensive, stashing away even small amounts of money for rainy day fun or passive income is maybe harder than itâs ever been.
Some are doing it though and doing it handsomely. One source has revealed that the most active investors in the UK (as a group) are saving £529 each month. Kudos to those folks on finding half a grand from every pay cheque.
But with that kind of savings rate, what could the end result be? Could it hit the million pound mark? Could it earn a meaty second income? Could it lead to a retirement age of 45? Letâs find some answers to those questions.
Outperforming
A sector that has dominated for growing wealth in recent years is technology companies, in particular American ones. As the world becomes more and more digital, I think any investor should consider owning US tech stock Amazon (NASDAQ: AZON) to build their nest egg.
The online marketplace has grown hundreds of times over in a couple of decades, but thatâs not what anyone should expect from here on out. A hundredfold increase in the firmâs $2trn market cap would make it worth as much as all the worldâs money and other financial assets ($130trn) and the worldâs GDP ($110trn) put together!
That’s not to mention a price-to-earnings ratio of around 35. That’s very expensive, as far as stocks go. It could mean a long way to fall if things go pear-shaped.
But as the number one online store in many of the worldâs biggest economies and with a money machine like AWS (Amazon Web Services) bringing in income, this might be another tech company that outperforms index funds in the future.
Questions
Letâs return to those questions of nest eggs, passive income and retirement. With a basket of high-quality stocks (perhaps including Amazon) helping to grow those savings, the returns look very fruitful indeed.
Is a million pounds possible? Yes. A £529 monthly saving grows to £1,091,244 given a 10% return rate for 30 years. Though lower return rates offer much lower end points. An 8% return grows to £745,123 and a 6% return to £515,517.
How about passive income? Well, a 4% drawdown rate gives £43,649 per year. Over £3,500 a month (tax-free in a Stocks and Shares ISA) sounds like a pretty good outcome. But inflation will mean that impressive income stream will have much less buying power than it would today.
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 about early retirement? Replacing the day job with passive income is trickier to calculate as it depends on how old an investor might be.
But one of the great advantages to investing in stocks independently, rather than through a typical pension, is that there’s no age restriction on when the withdrawals can begin.
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. 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.
