How big should your Stocks and Shares ISA be to target a £500 weekly income for life?
A Stocks and Shares ISA is a brilliant way to build long-term retirement wealth. It’s simple to understand, flexible, and buying and selling shares via an online platform is pretty straightforward once an investor has set one up.
The tax advantages are massive: all growth and dividends are free from HMRC and withdrawals are completely tax-free.
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.
Aiming for £500 a week in retirement works out at £26,000 a year. Using the 4% withdrawal rule (which assumes investors can take 4% of their pot each year without eating up their capital), that would require a pot of around £650,000.
That might sound a big ask, but time is the investorâs secret weapon. Someone who puts away £550 a month for 30 years and earns a total return of 7% a year could end up with around £667,000. The key is to reinvest every dividend along the way, letting compound growth do the heavy lifting.
Playing the long game
Short-term stock market volatility is inevitable, but regular investing helps smooth the journey. Personally I target individual UK stocks with reliable dividend potential and growth prospects too. Both the FTSE 100 and FTSE 250 are packed with companies that pay steady income streams. Given that most companies aim to increase their dividends over time, that passive income stream should also increase, with luck.
British American offers income and growth
FTSE 100 cigarette maker British American Tobacco (LSE: BATS) boasts a brilliant long-term track record of giving investors both dividend income and share price growth.
Over the past 12 months the shares are up hugely impressive 47%. That’s terrific going, especially for a sector that just a few years was pretty much written off as smoking declined in the West. However, it’s holding up elsewhere, while British American Tobacco has used its strong portfolio of brands to maintain market share and pricing power. It’s also exploring new areas like vaping through brands Vuse, glo, and Vype.
Despite their strong run, the shares still trade on a price-to-earnings ratio of about 10.5. The stock isn’t without risks. Smoking kills, and regulators are always ready to stamp down.
Also, after such a strong share price run the pace of future growth might slow. The shares can’t keep rising at 50% a year.
Dividends aren’t guaranteed. Payouts have grown at around 4.55% a year for the last decade, but the pace has slowed to about 2.7% over the last five years. That suggests the next few years may also be flatter.
There are risks with every single stock and that’s why I aim to build a balanced portfolio of around 15 to 20 a Stocks and Shares ISA. Some have greater growth potential, some likely to offer more income. I’m hoping to generate a higher total return than 7% a year, and so far I’ve done just that. As ever with investing, there are no guarantees.
It’s important to remember that this is not an overnight job. It takes years and decades, and there’s no time to lose. The rewards are financial freedom and a retirement to look forward to, rather than dread. And with lower tax bills, thanks to the unbeatable Stocks and Shares ISA.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
