How big should your ISA be to generate £2k monthly income in retirement?

AÂ Stocks and Shares ISAÂ is a terrific way to build a pot of wealth to generate a long-termÂ passive income for retirement. The ISA wrapper shields all capital gains and dividend income from tax, which means every pound is free to grow without HMRC taking a slice.

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.

Creating a second income of Â£2,000 a month, or Â£24,000 a year, is more than doable but takes time. Using the 4% ‘safe withdrawal rate’ as a guide, the ISA pot needs to be around Â£600,000. If an investors built a portfolio generating income of 6% a year from dividends, they could cut that to Â£400,000. I think it’s always good to aim high though.

Thatâs a huge number, but spreading contributions across a working life can make it achievable. If someone puts away Â£500 a month (Â£6,000 a year) and the ISA grows at an average 7% a year, they’d hit the higher Â£600k target in roughly 30 years. They say assumes they reinvest all their dividends today, to buy even more shares.

FTSE 100 dividend stocks

My own ISA leans heavily towards solid dividend payers on theÂ FTSE 100, includingÂ Phoenix Group HoldingsÂ (LSE: PHNX). It has one of the highest trailing yields on the blue-chip index, at 8.2%. That’s roughly double what I could get from cash, with potential share price growth on top. Obviously, there are more risks. Dividends are never guaranteed, as companies need to generate enough cash to fund them.

Phoenix generated operating cash of Â£1.4bn in 2024, up 22% on the previous year. In June, it reported a Â£3.6bn Solvency II surplus and a 175% capital ratio in June, which helps to underpin the dividend. A very high yield always carries some risk, yet Phoenix has raised its shareholder payout for nine consecutive years. The average uplift was 3.02% a year over the last decade. That didnât always keep pace with inflation, but it was at least consistent.

Iâd expect dividend growth to slow to around 2% a year from this point, which still looks fair if inflation drops back.

Share valuation shifts

The shares have slipped 3.3% over the past week after the latestÂ FTSE 100Â wobble. That feels modest given the worries swirling around markets today. Over 12 months, the stock is still up roughly 32%. With dividends reinvested, the total return climbs past 40%.

Thatâs pretty nifty for a company many view as a steady blue-chip rather than a rapid grower. If interest rates continue to fall, reducing yields on cash and bonds, the Phoenix yield will look even more attractive, which could draw in more investors.

There are risks. Phoenix manages almost Â£300bn in assets to meet long-term liabilities, and a stock market correction would hurt. Iâm not expecting the share price to keep climbing at recent speeds, which is why investors who consider buying should only do so with a long-term mindset. That also gives those dividends time to compound and grow.

Diversification matters. Different sectors move at different times, and a broad Stocks and Shares Isa portfolio smooths out the journey. With patience, a clear plan and an emphasis on long-term growth, that Â£2,000 monthly goal gets a lot closer. There’s no time to lose and with the FTSE 100 falling, shares are getting cheaper.

The post How big should your ISA be to generate Â£2k monthly income in retirement? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Phoenix Group Plc. 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.