£20k in savings? How I’d aim for a second income of £2k a month 

This Fool is considering how to create a second income stream of £2k a month by investing in a diversified portfolio of growth and value shares.

| More on:

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.

Young black colleagues high-fiving each other at work

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.

A second income is a great way to help fund a more comfortable retirement. 

However, the average 45 to 55-year-old in the UK has only £20k (or less) in savings. Most people won’t be able to stretch that very far once they’ve retired. Withdrawing £2k a month would deplete those savings in less than two years.

Fortunately, there’s still time to save up £20k and convert it into a consistent and reliable second income stream.

The ISA route

The first step to consider is a Stocks and Shares ISA, which allows investments of up to £20k a year tax-free. Investors can select whatever shares they want to include in the ISA and won’t be taxed on the returns.

There are several UK banks and financial institutions that offer a Stocks and Shares ISA, each with varying fees and features.

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.

Calculating returns

To figure out how to achieve £2k a month in returns, it’s necessary to calculate how an investment will compound over several years. This provides an idea of the type of shares that would need to be included in the ISA.

A well-balanced and diversified portfolio of shares typically returns between 5% and 10% a year. Returns can come from both share price appreciation and dividend payments. To benefit from both, it’s best to include a mix of dividend-paying shares and reliable, long-term growth shares.

Let’s consider an average dividend yield of 4% with an average price increase of 6% per year. By reinvesting dividend payments to further compound the returns, a £20k investment could reach £354,782 in 30 years. The annual 4% dividend payment would be £13,088 — just over £1,000 a month. Dividends aside, at this point a £2,000 monthly withdrawal would last 177 months, or almost 15 years. 

However, by investing a further £150 per month throughout the 30 years, the investment could grow to £654,278. Then the 4% annual dividend payment would be £24,071 — over £2,000 a month. This amount could now be withdrawn monthly without reducing the overall value of the investment!

A share to consider

Scottish Mortgage Investment Trust (LSE:SMT) is a well-diversified mix of shares and investments, providing exposure to a range of popular companies in both the private and public sectors. Diversification makes it less susceptible to unforeseen events affecting specific industries or regions.

Despite the seemingly localised name, the Edinburgh-based investment also includes shares in popular foreign stocks like Tesla and Amazon. Although it’s down 40% since its peak in late 2021, it gained 31% in the past year and is up 64% over five years. This highlights the benefits of long-term investing.

However, some analysts feel the stock lost its shine after a management change in 2022. The share price fell since and was recently trading at a discount of 15% below the net asset value (NAV). On 15 March, Scottish Mortgage announced a £1bn buyback program, which has helped the share price increase 10% since. US hedge fund Elliot Investments bought a 5% stake in the firm — likely a strategic attempt to benefit from the discount.

Despite the recent struggles, Scottish Mortgage Investment Trust outshone the FTSE All-share index over the past year and now looks set for more growth. If I were formulating a second-income portfolio, I think it would make a great addition.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Tesla. 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

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »