No savings at 30? Here’s how I’d aim for passive income of £3,000 a month

Charlie Carman explains how he’d aim for a long-term target of £36k a year in tax-free passive income if he started investing in stocks at the age of 30.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Mixed-race female couple enjoying themselves on a walk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Earning a decent stream of passive income can be critical in funding a successful retirement. For instance, a tax-free sum of £36k a year might sound appealing to many investors. It would mean being above the UK’s average full-time salary in 2022. And that’s before tax!

It’s an ambitious target, but if I was starting at 30 with zero in the bank, could I still achieve this goal by investing in the stock market?

Yes, I believe so. Here’s why.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Building wealth

Securing a passive income stream of £3,000 a month — or £36,000 a year — is no mean feat. Using a 4% dividend yield across my assets as a benchmark, I’d need a portfolio valued in the region of £900k to reliably enjoy that kind of income for a 30-year retirement.

Accordingly, if I was making my first foray into stock market investing at 30, this would be a long-term ambition. Building a big stock market portfolio demands a risk appetite and an abundance of patience.

My preferred strategy is to buy-and-hold quality shares for long time periods, aiming to harness the power of compound returns through a blend of growth and income investing styles.

For instance, my portfolio currently spans stocks such as US tech giants Alphabet and Microsoft as well as FTSE 100 shares like pharma giant GSK and mining conglomerate Rio Tinto.

Tax and government bonuses

With long-term objectives and tax optimisation in mind, I’d use investment vehicles such as a Stocks and Shares ISA and a Lifetime ISA.

Prospective investors should note that there are withdrawal penalties on Lifetime ISAs before the age of 60 or if the cash is not used for a first home purchase.

However, the 25% government bonus on up to £4k of contributions each tax year is a very attractive proposition. Accordingly, the Lifetime ISA would sit at the heart of my strategy.

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.

Crunching the numbers

If I wanted to achieve my goal by 60, the contributions I’d need to make to secure a £900k portfolio would vary significantly depending on the compound annual growth rate (CAGR) across my stock market positions. To illustrate this, the table below models three different scenarios.

Each scenario assumes I receive an additional £1k government bonus by maximising my £4k annual Lifetime ISA contributions. Any remainder, I’d invest in a Stocks and Shares ISA.

6% CAGR8% CAGR10% CAGR
Yearly contributions
required
£9,740 (+£1k) £6,357 (+£1k)£4,000 (+£1k)

If my stocks collectively grew at a 10% CAGR, three decades of investing in a Lifetime ISA would deliver a £904.7k portfolio — so I wouldn’t need a Stocks and Shares ISA at all!

Risk management

However, that’s a higher rate of return than the 6-8% annual gain that the FTSE 100 index has averaged historically. There’s a risk my stocks could underperform, which would demand a longer time horizon or higher contributions.

Nonetheless, with a sensible risk management strategy, earning £3k in tax-free passive income a month is an achievable aspiration. For instance, I diversify my positions across different companies and sectors and I also plan to boost my exposure to fixed income assets, such as gilts, later down the line.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Charlie Carman has positions in Alphabet, GSK, Microsoft, and Rio Tinto. The Motley Fool UK has recommended Alphabet, GSK, and Microsoft. 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.

More on Investing Articles

Investing Articles

With a 9.5% yield, could this FTSE 250 share be a dividend gold mine?

Christopher Ruane is eyeing a FTSE 250 with a dividend yield approaching double digits. Here's what he likes about it…

Read more »

Investing Articles

2 key reasons Nvidia stock could still soar from here

Even after the chipmaker's stunning performance in recent years, this writer sees reasons that could potentially help propel its share…

Read more »

Investing Articles

Here’s how £10k could set a stock market beginner on the path to riches in 2025!

Christopher Ruane sets out how taking a considered approach could mean even a stock market novice with £10k to invest…

Read more »

Investing Articles

The BAE share price struggles despite strong earnings and a 10% dividend increase. Is it still a buy to consider?

The BAE share price dipped 3% in early morning trading after posting its full-year 2024 results. Our writer considers if…

Read more »

Investing Articles

Could this Nvidia-backed growth stock be a millionaire-maker at $10?

This little-known artificial intelligence growth stock is backed by chipmaker Nvidia and recently jumped nearly 24% in a single day!

Read more »

US Stock

£10,000 invested in the S&P 500 the day before the presidential election is now worth…

Jon Smith explains how the S&P 500 has performed since last November and identifies a key winner in the months…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Should I consider buying Glencore as its share price slumps to multi-year lows?

FTSE 100 stock Glencore continues to see its share price slump. Now at its cheapest since September 2021, should I…

Read more »

Investing Articles

£5,000 invested in Lloyds shares 3 months ago is now worth…

Lloyds shares have done well over the past three months but all of the bank's FTSE 100 peers have done…

Read more »