Here’s how drip-feeding £200 a month into a Stocks and Shares ISA might grow into a recurring £16,634 income – received year after year, come rain or shine – that wouldn’t even eat into the nest egg.
The ISA is crucial. The Financial Times called ISAs “arguably the best investment ‘wrapper’ in the Western world” and it’s hard to disagree.
I can deposit up to £20k a year – with no balance limit – and every pound gets a lifetime tax exemption on interest, capital gains or dividends. These taxes can take off 39%!
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.
What you know
That’s why Rishi Sunak has faced calls to alter ISAs. Let’s hope it doesn’t come to that — these accounts help modest savers as much as anyone — but I’m taking advantage while I still can.
My first £200 might go into a growth-orientated business, perhaps one I know as a customer, following the advice of Lynch and Buffett to “buy what you know”.
I’d also look for growing revenue, solid cash flows, good management, and reasonable debt.
Games Workshop (LSE GAW) ticks all those boxes. I also like the strong moat from its fantasy worlds and own the shares already.
I have some experience with the company as a customer too — I remember going into their shops when I was only nine!
As for growth, the intellectual property might be key. The company already licences Warhammer 40,000 for video games and an Amazon series starring Henry Cavill is in the works too.
Let’s say the Games Workshop shares grows 10% yearly. That’s not too demanding, but in reality the growth would be erratic.
Even still, I sit around for 12 months to earn maybe £20? It doesn’t really seem like I’m getting anywhere.
Very boring
But this strategy isn’t about lightning-fast returns. It’s about boring wealth-building.
Given time, the cash invested balloons. After 30 years, that same £200 would have grown to £3,489. Not bad.
And I’d be doing this every month — drip-feeding a new £200 — all growing my ISA with an eye on giving up work and retiring early.
As my nest egg grows, I’d aim to craft a portfolio of prudently-chosen stocks from the UK and abroad. Around 15 to 20 spreads risk around nicely.
Risk can never be fully removed, of course. I may not achieve my target and I can lose money too.
But if I drip-feed £200 monthly and get 10% for 30 years? Well, my Stocks and Shares ISA has snowballed into a cash balance of £415,859.
Do what I want
I’d be thrilled with that alone, but I could put a bigger smile on my face by withdrawing an income from it. A 4% drawdown gives me £16,634.
The 4% could come from dividends or by selling shares. Either way, that 4% figure has been studied to give a low chance of eating into the nest egg even over decades.
If things go smoothly, I might have a state pension and a paid-off house too. That’s the kind of financial freedom to give up work, retire early, or just do what I want all day.
