£50k of savings? Here’s how I’d aim to turn that into passive income of £10k a year 

Investing in shares is a brilliant way of building a passive income for retirement. Just look how much a £50,000 lump sum could generate.

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Generating passive income from a portfolio of shares in retirement is the dream for many. It’s certainly what I plan to do. The State Pension offers a solid baseline income, but it won’t be enough on its own.

If I had £50,000 of savings, I’d use the summer to build a portfolio of FTSE 100 shares for dividend income and growth. While £50k sounds a lot, it isn’t enough to live on in retirement.

If I bought a selection of stocks with an average yield of 7%, it would give me income of just £3,500 a year today, well short of the £10k target I’ve set myself here.

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Time is still on my side

I am nowhere near retirement age yet, which gives me scope to increase the value of my £50k over time, from a combination of stock market growth and reinvested dividends.

Investors who do this can generate a steady long-term growth, even if the long-awaited bull market takes time to arrive. Over the last 20 years, the FTSE 100 has delivered an average annual return of 6.89%, with dividends reinvested.

Taking that as a benchmark, after five years my £50,000 would be worth £69,768. That’s good, but isn’t enough to hit my target as my projected 7% yield would still give me income of just £4,884 a year.

After 10 years of FTSE 100 investing and reinvesting, I would have £97,351. Which would give me dividend income of £6,815 a year, still well short of my target. Investing is a long-term process and building serious wealth takes time.

Cutting to the chase, it would take me 16 years, at which point I would have £145,199 producing annual income of £10,164. If I continued to leave my money invested after that, my capital would grow and grow, and so would my income.

Someone who invested £50,000 in the FTSE 100 at the age of 35 and left it there until 67 would have £421,654, giving them handsome passive income of £29,516 a year.

I’d start with these stocks

This strategy isn’t a 100% surefire winner, no investment strategy ever is. My portfolio may end up generating less than 6.89% a year, although on the other hand it could produce more.

Short-term stock market movements are volatile and hard to predict, and if markets crash just before I retire, that could reduce my income. Also, the real value of my capital and income will be eroded by inflation over time. So as well as my £50k lump sum, I would invest regular sums whenever I had cash to spare.

I’d start by investing in high-yielding FTSE 100 shares such as Lloyds Banking Group, which currently pays income of 5.27%, but is forecast to yield 6.2% next year, insurer Aviva, which yields 7.62%, and mining giant Rio Tinto, which pays income of 7.75%.

Some FTSE 100 stocks pay even more dividend income than that, for example, with fund manager M&G yielding a whopping 9.61% a year.

Dividends are never guaranteed and can be cut at any point. M&G’s looks vulnerable to me. That’s why I’d invest my £50k and subsequent top-ups in around a dozen FTSE 100 stocks to balance my risk, while focusing on those with the best passive income prospects.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in Lloyds Banking Group Plc, M&G Plc, and Rio Tinto Group. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&G 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.

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