£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it’s possible to build a large and steady passive income for retirement. Royston Wild explains.

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Investing in UK and US shares can be an excellent way to create wealth. After several decades, the pot of money (hopefully) built up could be enough to provide a plentiful and reliable passive income.

Here’s what I’d do to target a second income above £20,000.

Eliminate tax

The first thing on my list would be to open an Individual Savings Account (ISA), and/or a Self-Invested Personal Pension (SIPP). I actually use both of these products to help me save on tax.

Over the long term, these products could boost my wealth by tens of thousands of pounds, perhaps more. This is because both the ISA and SIPP save me from paying a single penny in capital gains tax (CGT) and dividend tax.

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.

Build a balanced portfolio

I’ve always aimed for a well-rounded and diversified portfolio of different types of shares. With this strategy, I can tweak my holdings according to my risk and return preferences, not to mention create a smooth return over time.

Starting out, a new investor could consider building a portfolio split between growth and dividend shares. I think 10-15 is a good number to aim for.

Greggs, Ashtead, and Games Workshop are examples of UK shares that investors can think about adding to their ISAs or SIPPs. Investors can also consider supplementing with high-growth US tech shares like Nvidia, Tesla, and Amazon. While these kinds of growth shares are volatile at times, they can deliver substantial long-term share price appreciation.

I think it makes sense to add some dividend stocks alongside these, for a steady stream of income to reinvest, which allows gains to compound over time. Companies in this bracket include Aviva, HSBC, and Halma.

A £20k+ passive income

A quick and easy way to achieve such diversification could be to invest in an exchange-traded fund (ETF). The iShares FTSE 250 ETF (LSE:MIDD) is one such instrument that provides a good mix of growth and dividend shares.

As the name implies, it invests across the entire FTSE 250 index, with weightings according to market capitalisation. This enables investors to effectively spread risk, while at the same time providing a broad selection of investment opportunities.

Some of the fund’s largest holdings include financial services provider Alliance Witan, hobby specialist Games Workshop, and real estate investment trust Tritax Big Box.

On the downside, most of the index’s earnings are generated from the UK, where economic conditions remain tough. But on balance, I still think the fund’s still an attractive investment for long-term investors to consider.

This FTSE 250 fund has delivered an average annual return of 8.4% since 2004. Past performance is not always a reliable indicator of future returns. But if this continues, a £500 monthly investment into it would turn into £507,618 over 25 years.

A pension pot this large could then deliver a £20,305 passive income, based on a 4% drawdown rate. And added to the State Pension, this could provide a significant flow of money to live off in retirement.

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. Royston Wild has positions in Ashtead Group Plc, Aviva Plc, Games Workshop Group Plc, and Tritax Big Box REIT Plc. The Motley Fool UK has recommended Amazon, Ashtead Group Plc, Games Workshop Group Plc, Greggs Plc, HSBC Holdings, Halma Plc, Nvidia, Tesla, and Tritax Big Box REIT 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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