Building passive income streams that can last a lifetime is a goal for many investors, including me. But, what if I started investing in my 30s for the first time — could I achieve this objective?
Absolutely.
Here’s how I’d target lifelong passive income with just £333 a month.
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Lifetime ISA
My first step would be to focus on tax optimisation. There are several vehicles I could use for my stock market investments, but with £333 a month to invest, I think a Lifetime ISA would be appropriate.
At present, I can invest £4,000 annually in a Lifetime ISA — that equates to £333.33 per month. One key advantage to the Lifetime ISA is the 25% government bonus added to my contributions. In essence, if I contribute £4,000 in a tax year, I’d get an additional £1,000 on top!
A drawback is the fact that I can’t withdraw from the ISA without incurring a penalty unless I’m buying my first home or until I reach the age of 60. As I plan to use the Lifetime ISA for passive income to support my retirement, I’d invest with a 30-year time horizon before I begin withdrawing from the ISA wrapper.
Dividend stocks
The second step is to decide what I’d invest in. As passive income is my aim, I’d choose high-yield dividend stocks.
There are plenty of income-producing shares in the FTSE 100 and FTSE 250. For instance, Lloyds shares currently offer a 4.67% dividend yield. I think the bank is a good pick as interest rates rise. Another FTSE 100 share I’d buy is global investment manager M&G, which sports a whopping 8.41% yield.
Turning to mid-cap shares, another bank I like is Investec, thanks to its 5.3% yield. Diversification is important, so I’d look beyond financial stocks too.
Target Healthcare REIT also offers a bumper dividend at 8.78%. I’m optimistic about the real estate investment trust’s exposure to the care home sector, as long-term demand seems promising due to the UK’s ageing population.
There’s a risk with all these stocks that dividends could be cut or suspended. That’s why I’d spread my investments across a range of companies and sectors. In doing so, I hope I could rely on passive income streams from at least some of my holdings if any one business encountered difficulties.
Compound returns
Let’s imagine I secured a 7% return on my investments. In reality, this figure could be higher or lower, depending on how the stock market performs, but I think it’s a reasonable number to use for modelling purposes.
Currently, I can only invest in a Lifetime ISA until the age of 50. After that, I can leave my stocks in the ISA wrapper, but I can’t contribute more. If I invested £333.33 every month for 20 years from the age of 30, my portfolio would be worth £245,564 after two decades (including the government bonus).
Leaving that sum to compound for another 10 years, I’d have £493,498 by the time I was 60. At a 7% dividend yield, that equates to £34,544 in annual passive income without having to sell my shares.
That’s an amount that allows me to contemplate early retirement, which shows it’s never too late to start investing.
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.
