How much will you need in an ISA to earn a £3,000 monthly passive income in 2051?

The Stocks and Shares ISA is in my view the best way to target a large passive income in retirement. Not only does it harness the wealth-building power of the stock market, capital gains and dividend taxes are excluded, while withdrawals are also protected from HMRC. Every penny an investor earns is theirs and theirs alone.

The real benefit of these tax-efficient vehicles becomes clear over time, as those tax savings and reinvested dividends compound to accelerate portfolio growth. By the time someone gets to retirement age, they can find themselves with a fat pot of cash that provides a regular income.

The question is, how large does an ISA need to be to generate a Â£3,000 second income by 2051?

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.

Planning for income

A monthly Â£3k income amounts to Â£36,000 a year. With the cost of living and social care rising, and questions over the State Pension’s sustainability growing, it’s a pretty good sum to aim for, in my opinion.

What’s the best way to earn a retirement income from an ISA though? Some people like to purchase an annuity with all or some of their nest egg. Withdrawing a percentage of a portfolio in cash is another popular option.

My own plan is to invest in high-yield dividend shares. In theory, it provides scope for further capital growth while simultaneously delivering a sustained passive income stream. If someone chose this route and put their money in 7%-yielding shares, they’d need a Stocks and Shares ISA worth Â£515,000.

Building wealth

That may seem at first glance a big mountain to climb. But for someone looking to build that between now and 2051, history shows it’s a very achievable goal. The compounding effect over 25 years, mixed with large ISA tax savings and stock market returns can be phenomenal.

Let’s say we have a 40-year-old who begins investing Â£500 a month in shares. They’d have reached that magic Â£515,000 retirement fund by the time they reach 65 if they can achieve an 8.5% average annual return.

Given long-term investors tend to enjoy an 8%-10% yearly return, that’s a very realistic target to aim for.

A top FTSE stock

Building a diversified portfolio of individual shares instead of buying an index tracker can bring this goal even closer. One I believe is worth serious consideration today is Games Workshop (LSE:GAW).

The miniatures and wargaming products it manufactures and sells aren’t to everyone’s tastes. But the returns the FTSE 100 stock’s delivered down the years are exactly what all investors crave.

Over five years, it’s delivered an average annual return of 16.4%, with share price gains and dividends bundled up.

Can Games Workshop’s shares keep delivering? I’m optimistic they can. Competition’s rising, and US tariffs pose a threat. But the company’s leading position in the rapidly growing fantasy wargaming market creates enormous earnings opportunities.

It’s also ramping up licensing of its Warhammer IP to supercharge royalty revenues and introduce its products to new generations of hobbyists.

It does face risks though, which is why building a diversified basket of different shares is so important. Over the long term, a well-constructed portfolio can deliver a brilliant passive income, with the tax-free returns of the ISA providing an extra boost.

The post How much will you need in an ISA to earn a Â£3,000 monthly passive income in 2051? appeared first on The Motley Fool UK.

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Royston Wild 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.