Generating a second income of £10k every year from an initial savings pot of the same amount sounds ambitious. However, I think it’s perfectly achievable. The key is being willing to lock my cash away in the stock market, accept some risk, and be patient.
Let’s crunch some numbers
To get my mitts on that amount of second income I’d need a pot of £200k. This is assuming I target an eventual yield of 5% (£200k x 0.05 = £10k) via dividend stocks and funds.
Needless to say, accumulating that £200k will take time. Still, let’s imagine I were able to achieve average returns of 10% from the stock market.
Sure, that’s high (the long-term average is around 7-8%). But it’s far from impossible. I could do even better if I managed to pick some great-performing stocks along the way. Just look at how Rolls-Royce, Carnival and Marks & Spencer have done in 2023!
With that 10% annual return, I’ll have a smidgen under the £200k (£198,373.99, to be precise) after 30 years.
More speed, captain!
By now, it should be clear that generating a big second income doesn’t happen overnight. But there are ways I can speed things up.
Bear in mind that the sums above are based on not making any additional contributions over time. Anything extra I’m able to add to this amount could lead to a better outcome since more money is being allowed to compound.
What monthly expenses could go? Could I maintain my fitness by running around the park regularly rather than pounding the treadmill at my (expensive) local gym, for example? Every little helps.
The more money I invest, the lower my required return needs to be to hit that £200k goal in 30 years.
Alternatively, the more money I invest with a 10% average return, the fewer years I need to accumulate the same amount.
SIPP it
Another thing I could do is invest the initial £10k (and any additional amounts) via a Self-Invested Personal Pension (SIPP). Doing this would allow me to receive tax relief on my contributions.
To illustrate, I would get £2.5k in extra cash from the government if I were a basic rate taxpayer.
Running the numbers again — but with £12.5k in initial savings rather than £10k — would give a nest egg of almost £250k!
One snag with a SIPP is that I can’t access this income until 55 years old (as things stand). If I wanted to access this money earlier (but probably a lower amount), I’d opt to invest via a Stocks and Shares ISA.
I also need to remember the impact of inflation. Receiving £10k a year in 2053 won’t feel the same as receiving £10k in 2023.
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.
On your marks…
The sums I’ve used today are just for illustrative purposes. Not everyone will have thousands of pounds hiding down the back of the sofa. However, a more modest second income stream can still be achieved via the stock market from scratch.
As many experienced Fools will attest, the key is to just get started.
